Message Font: Serif | Sans-Serif
No. of Recommendations: 11
Okay, maybe not the crushing deluge of entries I was imagining, but I'll push the ball a little further. thanks for those who humored me with responses, especially ET's good summary of some of the uniquely strange aspects of the story. A few brief comments on the replies to-date before going on to part two.

Some wondered how management could succeed at keeping its stock price depressed. This can be an interesting question. What would happen, for example, if Mark Zuckerberg (who has 60% voting control) announced tomorrow that he considered it in Facebook shareholders' long term best interest that it donates 80% of earnings to charity every year? I mean, sure, lawsuits, but in the meantime you probably don't want to own the stock that morning. Naj mentioned dividends as a reliable method, and of course it usually is, but it's interesting to think whether that necessarily applies to something as strange as MyCo. After all, most firms see their value drop on the ex-date by the value of the dividend because they are presumed to be maximizing future profits and they have unloaded some of those profits. But MyCo may not be maximizing future profits at all, in fact it specifically claims the opposite, so it isn't clear whether a dividend should ex-post affect the stock price much at all. More on that later.

But a couple of thing that were in the writeup that didn't get any attention seem important: The Company proudly trumpets its current streak of complying with the Significant Amount clause for 89 consecutive quarters, the longest stretch of its multi-decade operating history. Skeptical or not about management's power to influence the stock price, it has to at least catch your interest that they have hit their bizarre goal of negative low single digit stock returns for over twenty years running. Sure it could be ephemeral, but it gets your attention. And maybe this cuts both ways? For example ET was not skeptical about management's ability to burn the building down (given their strange corporate governance), so he thought the shares were maybe close to worthless. But for twenty years running MyCo's stock has reliably only dropped a little, never a lot, exactly as promised (interestingly, no one asked about the current stock price in determining value, despite this strange regularity and management's express guidance). Not only that, but those A shares have actually been offering you a bonus in addition to those small losses: If you hold MyCo common A shares, you are permitted to display your MYCO score in a proprietary golden font anywhere it is used or queried. This has become known as your MYCO Flair. The more shares you own, the fancier your Flair gets. Even if the option on toppling MyCo's strange Bylaws and U share governance system never gets exercised, are we sure this combination of promised returns and bonus value are worthless? That lead to the next part.

MyCo, Part 2: Flair Value

In Part I I sketched out a picture of MyCo as an unusual company and asked how you would start to think about valuing such a strange thing so roughly described. So let’s add some information about MyCo. Start with a key piece of information deliberately hidden in Part 1: The MyCo stock price. Normally, a true blue value investor might scoff at the idea of needing the trading price of a stock to figure how to value a business. And maybe you feel the same here. But as mentioned in Part I, MyCo is at least a little different than most companies, in that the Board has a unique goal of keeping the stock price in a narrow, stable range where it reliably declines a low single digit percentage every year.

Maybe the Board can’t simply will this goal into existence by fiat, so you don’t think it matters much. I mean, companies can write down in their Charters they’d like the stock to double every year, but that doesn’t mean it will happen. But to the extent you were wrong and the Board somehow could shape MyCo’s stock performance in accordance with its goals (which are rather modest in comparison), the stock price would suddenly matter a whole lot. So here it is.

MyCo is trading at $100 a share. So with one billion shares out its market cap is $100 billion. Ten years ago today the stock was at $125. The interim drop has been mostly linear, with very modest volatility. During that time it paid no dividends, so the CAGR for MyCo shareholders has been about -2% per annum. The company considers this result fully compliant with its Charter directive to provide extraordinary safety and stability.

In fact, the Board was so happy with its stock performance it recently approved a contract extension for the CEO. But not the CEO of the main MyCo business. The company is operated in two primary segments: Reviews and Flair. Reviews covers the core MYCO business, while Flair is solely focused on the emblazoned score perk enjoyed by Class A shareholders. While the Reviews’ CEO is generally considered the big kahuna, the two divisions rarely interact.

Because Flair cannot be sold directly but is instead automatically determined by the number of A shares owned (more shares = more Flair), the Flair division is mostly relegated to a corporate treasury type function. The Reviews segment covers everything else. Both CEOs are charged with following the Board’s overall directives in their interpretation of the MyCo Charter, as opposed to maximizing the value of only their particular segment of the business.

Given her natural focus on MyCo’s shares, the Board long ago assigned the Flair CEO primary responsibility for compliance with the Charter’s directive to maintain safe and stable stock returns. Flair CEO primarily pursues her objective through strategically implemented stock buybacks and issuances. Let’s talk about how this has worked. For the most part, it is straightforward.

She watches the stock price assiduously. If the stock starts to show volatility that threatens her preferred trend of annualized low single digit declines, she acts by either purchasing (if the stock is dropping too much) or issuing shares (if the stock is rising). Of course the Flair CEO, like all corporate treasuries, has limited resources. So she can’t just repurchase unlimited amounts of stock to prevent it from falling. In fact, most CEOs who hoped to tightly control their stock price by altering buybacks and issuances would sooner or later be swamped by market forces and run out of resources. Not only that, but issuing/buying shares doesn’t necessarily make the stock price drop in the first place. She is not simply giving them away or making them vanish. She is selling shares in secondary offerings or buying them for market value. But she does have one advantage most CEOs don’t: Flair.

Most stocks are held solely for pecuniary returns. As a result, the quantity of shares outstanding doesn’t matter much, by itself. You can at least imagine a company with a billion shares outstanding and $100 billion in market value doing a huge billion-share secondary offering, doubling shares outstanding, and using the proceeds to buy another company (or pay down debt or hold cash or invest in an index fund, etc.) without affecting the share price much. But MyCo is different. If MyCo does that, it is doubling the supply of Flair outstanding, because each share represents a unit of Flair. MyCo has a monopoly on MYCO Flair, so as supply increases the marginal value of Flair declines (and it can expect that the price it receives for each incremental share issued will reflect this).

Similarly, when she buys shares, she reduces the supply of Flair and its marginal value starts to rise as people who really like their MYCO Flair bid it up. This gives her a way to affect MyCo’s stock price that most companies don’t have, or at least not nearly to the same degree.

Seen through the prism of Flair Value, MyCo’s stock price goals might suddenly seem a bit more more credible than that of a typical firm. When a normal CEO buys or sells shares in the open market, the per share price impact is small and does not inherently change the firm’s value per share. When the Flair CEO does so, she increases (buyback) or reduces (secondary) the per share value of Flair by changing the supply of a monopoly product.

So now you know the current stock price and you have an idea of how MyCo attempts to manage it to meet its Charter. You also have some indication that MyCo believes, perhaps reasonably, it has succeeded in meeting its goals in recent years. But we are investors. Even in a unique situation like this, the stock price isn’t everything, right? We value things.

Does this information change how you value MyCo from your original answer? Are there new things you want to know now to value MyCo? Can Office Space sue me?
Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.