A Preferred Stock Overview

n pursuing the right types of offers for our clients, we often encounter a stipulation in the Letter of Intent (LOI) that the Buyer is indicating that he would like to hold some type of preferred stock. Since there are numerous types of preferred stock offerings, we thought that it would be helpful to offer a short primer on this type of security.

Preferred stock is a hybrid between common stock and a bond. It is legally an equity security. Each share of preferred stock is normally paid a guaranteed dividend which receives first priority (i.e., the common stockholders cannot receive a dividend until the preferred dividend has been paid in full) and has claims over the common stockholders at the company's assets in the event of bankruptcy. Although preferred stock has priority over any common shares, it is still subordinate to the

company’s bondholders if this type of debt has been utilized. In exchange for the higher income and perceived safety, preferred shareholders forgo the possibility of large capital gains.

Arguably, the most important characteristic of a preferred stock is if it is either cumulative or non-cumulative. In a cumulative issue, dividends that are not paid (referred to as "in arrears") build up. Before any dividend can be paid on the common stock, the entire in arrears balance must be paid in full. If a preferred issue is non-cumulative and a dividend payment is missed, the shareholders are out of luck; they will, most likely, never receive that money from the company even if and when the enterprise encounters prosperous times.

There are a number of additional provisions that can affect the value of a preferred stock. Here are just a few:

• Voting vs. Non-Voting: Owners of preferred stock may or may not have voting rights. There have been cases wherein preferred shares only received voting rights if dividends had not been paid for a stipulated length of time.
• Adjustable rate preferred stock: Holders of the preferred stock receive a dividend that differs based on any number of factors stipulated by the company at the issue's initial offering.
• Convertible preferred stock: Holders of this type of security have the right to convert their preferred stock into shares of common stock. This allows the investor to lock in the dividend income and potentially profit from a rise in the common stock while being protected from a fall in the same.
• Participating preferred stock: Normally, shares of this type of preferred stock receive a set dividend plus an additional dividend based upon a stipulated percentage of either the net income or the dividend paid to the common stock holders.

The variations are endless. It is quite possible an investor could come across a non-voting cumulative participating convertible preferred issue. As you can see, preferred shares can have any combination of items attached to them. It is extremely important to have an investment banking firm, like Aspen Mergers and Acquisitions, explain the specific meanings and, more importantly, the effects of the type of preferred stock on you in any transaction.

In the event that a public company introduced a wildly successful new product, the common stock would go through the roof in anticipation of the tens of billions of dollars the shareholders expect to earn in the future. At the same time, the company's preferred shares probably wouldn't budge much in price. The preferred shareholders would have missed out on the huge capital gains, albeit while collecting dividend checks. If, two weeks later, the company announced that this new product had a serious defect and had to recall all of the units that it had sold, the common stock would plummet. What happens to the company's preferred shareholders? Not much as long as the business is still making the respective dividend payments, they haven't lost a dime.

If, however, the investor had owned convertible preferred shares in this scenario, the price of these convertible shares would have experienced a tremendous rise and fall based on the expected profit an investor could have realized by converting his shares into common stock. As long as the holder of the preferred did not convert his shares or acquire more preferred at the inflated price, he would experience no loss of principal.

Needless to say, you will want to be fully informed how the specific variation of preferred stock may affect you in any transaction. At Aspen Mergers and Acquisitions, our dealmakers have experience with dealing with all types of these offerings. If you are contemplating looking for an acquirer for your business, please contact us for private and confidential conversation. We charge no up-front fees for our services and would be pleased to review your opportunities with you.

Robert A. Veri
CEO

About Aspen M&A

Aspen Mergers and Acquisitions, Inc. are specialists in deal making with over 80 years of aggregate experience, serving clients nationwide through our offices in Los Angeles, Atlanta, Vail and Boston. Our mission is to enable middle market business owners to capitalize on their business value through transactions resulting in liquid equity. We offer a full range of professional services including contact with acquirers founded on our long standing buyer relationships. Please contact us for a free consultation. We charge no up-front fees and only get rewarded if a transaction closes. We are results driven and we would welcome having a private and confidential discussion with you.