The equity structure of public corporations may be a lively subject for academic debate, but it's rarely an issue in takeover battles.
For Philadelphia-based cable service provider Comcast Corp., however, it could cost the company the biggest deal in its history. On July 18, the board of directors of AT&T Corp. rebuffed Comcast's unsolicited $58 billion offer for the cable assets of the fading telephone giant, calling the bid inadequate, and adding that Comcast's unusual capital structure would "put AT&T shareowners at a disadvantage in matters of corporate governance," as AT&T CEO C. Michael Armstrong put it in a publicly released letter.
True enough. Thanks to a two-tier equity structure, the Roberts family (father Ralph and son Brian manage the business) has 87 percent voting control of Comcast, with only a 3 percent economic interest in the company. And though under the proposed terms of the Comcast/AT&T merger the family's voting control would be reduced to less than 50 percent, the Robertses' power would remain disproportionately large.
Of course, AT&T isn't exactly a paragon of enlightened corporate governance. It has had discussions with Cox Communications (another cable company with a class of supervoting shares) about the cable business, and it struck a deal with cable baron John Malone to get into the business in the first place. Malone's supervoting shares in Liberty Mutual Corp., a division that AT&T spun off to shareholders on August 10, give him control of the company. If a bidding war for AT&T's cable business develops, share structures and corporate governance records are sure to provide plenty of fodder for the business papers.
BETWEEN PRIVATE AND PUBLIC
Two-tier share structures, in which one class of shares has greater voting rights than another, may be common in the cable industry, but most U.S. public companies adhere to a single-share equity structure--one share carries one vote. It's simple and clean, and it's how the biggest institutional investors like it. Indeed, the influence of those institutions--many of which refuse to invest in companies with two-tier equity structures--has spurred significant numbers of companies to consolidate separate classes of stock. Defense contractor Raytheon Co., for example, scrapped a dual- class structure last February "to increase the overall liquidity of the company's stock and eliminate any confusion caused by having two publicly traded classes of common stock," says company spokesperson Amy Hosmer.
From a senior manager's point of view, a two-tier share structure can offer the best of both worlds: access to the public equity market and private control of the company. The structure is most common at family-owned companies that have recently gone public, and often represents a transition phase between private and full public ownership. As the business grows, so does the need for capital, and the discount for the inferior class of public equity becomes more costly. When it becomes a serious enough handicap to outweigh the benefits of private control, controlling shareholders typically opt to change the ground rules to a one-share, one-vote standard.
Last January, for example, Tekgraf Inc., a small computer graphics solutions provider in Vernon Hills, Illinois, that went public in late 1997, merged its two classes of shares, reducing the company's founding investors' voting interest to 40 percent--in line with their actual ownership. "We were trying to get people interested in the company, and the institutions said, 'Clean up your capital structure, then come see us,'" says Tekgraf CFO Thomas Mason.
Likewise, PMA Capital Corp., a property-and casualty-insurance company based in Philadelphia, consolidated its two classes of shares in April 2000. "We knew institutions didn't like the two-tier structure, so it made sense to remove it," says Al Ciavardelli, a vice president of finance at PMA. He says daily trading volume in PMA's shares has improved by about 15 percent since it made the change.
In certain industries, however, the two-tier structure has survived even at large companies. The most notable are the cable and media industries, where dominant individuals and founding families have played significant roles in their growth. Newspaper publishers like The New York Times Co. and Dow Jones & Co. argue that voting control by such families as the Sulzbergers and Bancrofts is necessary to preserve the editorial integrity of their product. At The Washington Post Co., the Graham family's class A shares don't hold extra voting power, but they carry the right to elect 70 percent of the board members. "We don't worry about the hostile-takeover environment," says Washington Post CFO Jay Morse. He's also largely insulated from Wall Street expectations; indeed, Morse doesn't bother giving quarterly earnings forecasts. "We have a narrow base of shareholders who understand how we invest their money," he says.
NOTHING SUCCEEDS LIKE SUCCESS
However, most companies with two-tier share structures don't have Warren Buffett anchoring their shareholder base. And they typically face a lot more criticism from institutional investors, to whom the notion of supervoting stock is anathema. "The idea of one share, one vote is integral to the concept of corporate governance," declares Peter Clapman, senior vice president and chief counsel for investment at pension giant TIAA-CREF. "A number of major companies have what we regard as flawed capital structures."
At the end of the day, however, success covers a lot of sins. Most investors care less about share structure than about good investment returns. Viacom Inc. chairman Sumner Redstone, who has 68 percent voting control of the company while holding only a 28 percent stake, was a favorite target of governance critics when Viacom's stock price languished in the early-to-mid-1990s. Since the beginning of 1998, however, Viacom A shares have doubled in price, and the criticism has all but disappeared.
Not that Redstone cares one way or the other. "I will control the company forever," he said after acquiring CBS Inc. in September 1999. It's a good job if you can get it.
Andrew Osterland (email@example.com) is a senior editor at CFO.