Small shareholders can sometimes be more trouble than they’re worth. But how can a company clean up its shareholder base without offending anyone?
It’s widely held that public companies should tidy up their shareholder rosters every once in a while. The best way to do this, many say, is by inviting the smallest investors – the odd-lot crowd – to either buy more shares or abandon their positions altogether.
Just as many public companies loudly woo retail investors, they know there are many accidental shareholders out there who would gladly sell if brokerage fees weren’t prohibitively high (sometimes the cost to sell exceeds the value of the shares). Why should a company pay to send these indifferent investors annual reports and proxy materials when the relationship could be severed, to everyone’s benefit?
The problem is that odd-lot holders can represent less than 2 percent of outstanding shares but half the total number of holders. Given that the cost for servicing an individual shareholder can average anywhere between $6 and $25 annually, offering an easy exit strategy for investors with, say, three shares worth $5 apiece looks like an attractive proposition.
Edward Fargis, vice president, counsel and assistant secretary at Medco Health Solutions, which has run two odd-lot cleanup programs in the past four years, notes that shareholder service firms, proxy solicitors and transfer agents regularly call him. They suggest that an odd-lot program might save Medco anywhere from hundreds of thousands to millions of dollars in administrative costs each year.
Gordon Stevenson, vice president, business development at DF King, notes that dropping a single registered holder saves a company an average of $12. Any firm with 5,000 to 10,000 odd-lot shareholders can do the math.
Although Fargis appreciates the opportunities to cut costs (Medco’s spin-off from Merck created a large odd-lot population), the company is concerned about sending the right signals to its shareholder base. ‘You want to handle this delicately,’ he says. ‘Our programs are totally voluntary.’
Odd-lot programs make intuitive sense. By aggregating a number of relatively small sales, companies get lower brokerage rates, explains Donald Gress, vice president and chief operating officer at Continental Stock Transfer & Trust Company.
Declan Denehan, chief operating officer at Mellon Securities, notes that shareholders who want to ‘round up’ can be paired with those looking to sell. ‘If you own 60 shares but don’t want to sell,’ he says, ‘you can perhaps buy another 40 shares through the program.’
A buyback offering makes most sense for companies that have recently undergone a corporate action that generates odd-lot holders. Examples include spin-offs, acquisitions and demutualizations. ‘A company doing acquisitions may be inheriting a lot of odd-lot shareholders from the companies they’re buying,’ says Scott Gallagher, senior vice president at Georgeson Shareholder, now part of Computershare.
More importantly, shareholders often view these as incidental holdings, observes Denehan: ‘These shareholders never made a decision to hold this security, and the new company wants to clean up its files because it doesn’t want to maintain all these disinterested shareholders.’
Medco is a case in point. When Merck spun off Medco in August 2003, investors got a windfall of twelve Medco shares for every 100 shares of Merck they owned. ‘Overnight,’ says Fargis, ‘the overwhelming majority of our shareholder base was made up of odd lots.’
Fargis is pleased with the response to Medco’s two odd-lot programs. In the second solicitation, which Medco completed this spring, 20 percent of shareholders elected to sell their shares, while 3 percent rounded up.
Response rates can vary widely. Gress estimates that anywhere from 25 to 40 percent of odd-lot holders will participate in a given program. Gallagher adds that typically over 60 percent of shareholders maintain their positions, 30 to 35 percent sell and 3 to 5 percent purchase new shares. But Jack Sunday, CEO of consulting and research firm Group Five, warns that these programs bear risks, and that there are ‘plenty of ten-percenters around.’
Calculating how much it costs to service a single shareholder is central to determining how effective an odd-lot buyback program would be. Numbers differ, of course, depending on the lavishness of your annual report, the number of shareholders served and the complexity of your proxy process.
Perhaps more important, though, is the number of odd-lot shareholders on the books. Without a significant universe of very small owners, these programs simply don’t make sense. That said, companies with a large percentage of registered odd-lot shareholders fare much better than those with predominantly street-name holders.
Dollars and cents are just one part of the equation. Public companies are naturally concerned with their image and fear that odd-lot buybacks may make them appear indifferent to the retail universe. As Denehan says, ‘We’re not trying to throw grandma from the train here.’
Companies interested in demonstrating concern have many options. Mellon embeds a bond of indemnity within its paperwork for those shareholders who can’t find their stock certificates. For small shareholders who have misplaced their proof of ownership, the offer can feel like found money. Most importantly, though, these programs maintain a diplomatic tone. Mellon is careful to avoid any whiff of coercion, says Denehan, adding, ‘We say that this is the offer, and if you don’t want it, we still want you as a shareholder.’
Yet some argue that odd-lot buybacks, no matter how artfully worded, send the wrong message. David Pitou, chairman of Stockholder Consulting Services, a consulting firm specializing in shareholder relations, worries that these programs ‘are inviting people to leave the company and implying that they are not important enough to keep.’
Pitou points out that ‘even small shareholders have value as company advocates, political supporters of the company’s views and real or potential customers. Why cut people from a prospect mailing list that has cost you nothing to build? I belong to the school that says keep all the friends you can.’
Market conditions often determine the popularity of odd-lot programs. Denehan observes that ‘over the last several years, as companies became more cost-conscious, we saw an increase in the number of companies doing this – and that increased level has been sustained.’
Those intent on embarking on odd-lot programs can learn from the example of others. For instance, these programs tend to work best if they stand alone. ‘Odd-lot programs get overshadowed by other packages,’ says Gallagher, who adds that mail still seems to be the communication vehicle of choice.
Timing also matters. Gallagher observes that some of Georgeson’s clients run an odd-lot program every two or three years, while others wait five or ten. Fargis attributes some of the success of Medco’s second initiative to the fact that the stock had appreciated sharply; therefore, some investors were happy to make a tidy profit and were ready to exit.
Finally, Denehan suggests that some companies might want to consider offering shareholders an interesting new option: donating odd lots to charity. Mellon is currently working with ShareGift, an organization that distributes the proceeds from donations of small holdings to nonprofit groups (see sidebar above, ‘A charitable odd-lot twist’).
Sunday applauds the idea. ‘Any time you try something like that – giving people more alternatives – it’s a good idea.’ In the end, fans of odd-lot buyback programs believe that presenting shareholders with flexibility, options and a clear explanation of their choices is what makes these offers succeed.
The problem is that odd-lot holders can represent less than 2 percent of outstanding shares but half the total number of holders. Given that the cost for servicing an individual shareholder can average anywhere between $6 and $25 annually, offering an easy exit strategy for investors with, say, three shares worth $5 apiece looks like an attractive proposition.
Edward Fargis, vice president, counsel and assistant secretary at Medco Health Solutions, which has run two odd-lot cleanup programs in the past four years, notes that shareholder service firms, proxy solicitors and transfer agents regularly call him. They suggest that an odd-lot program might save Medco anywhere from hundreds of thousands to millions of dollars in administrative costs each year.
Gordon Stevenson, vice president, business development at DF King, notes that dropping a single registered holder saves a company an average of $12. Any firm with 5,000 to 10,000 odd-lot shareholders can do the math.
Although Fargis appreciates the opportunities to cut costs (Medco’s spin-off from Merck created a large odd-lot population), the company is concerned about sending the right signals to its shareholder base. ‘You want to handle this delicately,’ he says. ‘Our programs are totally voluntary.’
Odd-lot programs make intuitive sense. By aggregating a number of relatively small sales, companies get lower brokerage rates, explains Donald Gress, vice president and chief operating officer at Continental Stock Transfer & Trust Company.
Declan Denehan, chief operating officer at Mellon Securities, notes that shareholders who want to ‘round up’ can be paired with those looking to sell. ‘If you own 60 shares but don’t want to sell,’ he says, ‘you can perhaps buy another 40 shares through the program.’
A buyback offering makes most sense for companies that have recently undergone a corporate action that generates odd-lot holders. Examples include spin-offs, acquisitions and demutualizations. ‘A company doing acquisitions may be inheriting a lot of odd-lot shareholders from the companies they’re buying,’ says Scott Gallagher, senior vice president at Georgeson Shareholder, now part of Computershare.
More importantly, shareholders often view these as incidental holdings, observes Denehan: ‘These shareholders never made a decision to hold this security, and the new company wants to clean up its files because it doesn’t want to maintain all these disinterested shareholders.’
Medco is a case in point. When Merck spun off Medco in August 2003, investors got a windfall of twelve Medco shares for every 100 shares of Merck they owned. ‘Overnight,’ says Fargis, ‘the overwhelming majority of our shareholder base was made up of odd lots.’
Fargis is pleased with the response to Medco’s two odd-lot programs. In the second solicitation, which Medco completed this spring, 20 percent of shareholders elected to sell their shares, while 3 percent rounded up.
Response rates can vary widely. Gress estimates that anywhere from 25 to 40 percent of odd-lot holders will participate in a given program. Gallagher adds that typically over 60 percent of shareholders maintain their positions, 30 to 35 percent sell and 3 to 5 percent purchase new shares. But Jack Sunday, CEO of consulting and research firm Group Five, warns that these programs bear risks, and that there are ‘plenty of ten-percenters around.’
Calculating how much it costs to service a single shareholder is central to determining how effective an odd-lot buyback program would be. Numbers differ, of course, depending on the lavishness of your annual report, the number of shareholders served and the complexity of your proxy process.
Perhaps more important, though, is the number of odd-lot shareholders on the books. Without a significant universe of very small owners, these programs simply don’t make sense. That said, companies with a large percentage of registered odd-lot shareholders fare much better than those with predominantly street-name holders.
Dollars and cents are just one part of the equation. Public companies are naturally concerned with their image and fear that odd-lot buybacks may make them appear indifferent to the retail universe. As Denehan says, ‘We’re not trying to throw grandma from the train here.’
Companies interested in demonstrating concern have many options. Mellon embeds a bond of indemnity within its paperwork for those shareholders who can’t find their stock certificates. For small shareholders who have misplaced their proof of ownership, the offer can feel like found money. Most importantly, though, these programs maintain a diplomatic tone. Mellon is careful to avoid any whiff of coercion, says Denehan, adding, ‘We say that this is the offer, and if you don’t want it, we still want you as a shareholder.’
Yet some argue that odd-lot buybacks, no matter how artfully worded, send the wrong message. David Pitou, chairman of Stockholder Consulting Services, a consulting firm specializing in shareholder relations, worries that these programs ‘are inviting people to leave the company and implying that they are not important enough to keep.’
Pitou points out that ‘even small shareholders have value as company advocates, political supporters of the company’s views and real or potential customers. Why cut people from a prospect mailing list that has cost you nothing to build? I belong to the school that says keep all the friends you can.’
Market conditions often determine the popularity of odd-lot programs. Denehan observes that ‘over the last several years, as companies became more cost-conscious, we saw an increase in the number of companies doing this – and that increased level has been sustained.’
Those intent on embarking on odd-lot programs can learn from the example of others. For instance, these programs tend to work best if they stand alone. ‘Odd-lot programs get overshadowed by other packages,’ says Gallagher, who adds that mail still seems to be the communication vehicle of choice.
Timing also matters. Gallagher observes that some of Georgeson’s clients run an odd-lot program every two or three years, while others wait five or ten. Fargis attributes some of the success of Medco’s second initiative to the fact that the stock had appreciated sharply; therefore, some investors were happy to make a tidy profit and were ready to exit.
Finally, Denehan suggests that some companies might want to consider offering shareholders an interesting new option: donating odd lots to charity. Mellon is currently working with ShareGift, an organization that distributes the proceeds from donations of small holdings to nonprofit groups (see sidebar above, ‘A charitable odd-lot twist’).
Sunday applauds the idea. ‘Any time you try something like that – giving people more alternatives – it’s a good idea.’ In the end, fans of odd-lot buyback programs believe that presenting shareholders with flexibility, options and a clear explanation of their choices is what makes these offers succeed.
