Wrigleys Dual-Class Equity Strategy free essay sample

Increased cash flow ownership increases capital expenditures and growth in advertising and RD spending, and firm value increases until managerial ownership of cash flow reaches about 33 percent. Increasing managerial control apparently has the opposite effect, perhaps because some firms adopt dual-class structures when their original owners are reluctant to cede control and seeking capital typically dilutes control. As a result these firms are less likely to tap the capital markets, typically invest less, grow more slowly, and have lower valuations. Question 3) Some people dislike companies with dual-class share structures, but the idea behind it has its defenders. They say that the practice insulates managers from Wall Streets short-term mindset. Founders often have a longer-term vision than investors focused on the most recent quarterly figures. Since stock that provides extra voting rights often cannot be traded, it ensures the company will have a set of loyal investors during rough patches. We will write a custom essay sample on Wrigleys Dual-Class Equity Strategy or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page In these cases, company performance may benefit from the existence of dual-class shares. And there are plenty of reasons to dislike these shares. They can be seen as downright unfair. They create an inferior class of shareholder and hand over power to a select few, who are then allowed to pass the financial risk onto others. With few constraints placed upon them, managers holding super-class stock can spin out of control. Families and senior managers can entrench themselves into the operations of the company, regardless of their abilities and performance. Finally, dual-class structures may allow management to make bad decisions with few consequences. There are several hundred dual structure companies in the United States, some as large as Ford. Question 4) Wrigley paid a special dividend that could ultimately concentrate more control of the company in the hands of Wrigley family members. Heres how it works: Wrigley investors are to receive one share of class B stock for every four shares of common stock they hold and one share of class B stock for every four class B shares they hold, just as is stated in the case. The B shares, held widely by the Wrigley family, carry ten votes, compared with one vote per each common share. The catch: If and when shareholders sell those B shares, they will be converted to common shares, with the result that remaining holders of the B share will become more powerful with each sale. Such a lopsided voting arrangement generally gets low marks by todays corporate governance standards, and in most cases, wed agree. But Wrigley executives say it allows the company to manage the business for the long term, and its hard to argue with the fact that Wrigley has done just that for the two decades the dual share-class structure has been in place. (Credit to Kiplinger Magazine. This happened too after Wrigley purchased both Lifesavers and Altoids from Kraft. I think the dual-structure is working well for Wrigley. They are making money. And if you don’t like how they are managed then don’t invest in them. Question 5) This is a fairly clever way of reinstating family control for the long haul, says Kenneth Henderson, a partner in finance and securities law with the law f irm Bryan Cave LLP in New York. Wrigley spokesman Christopher Perille acknowledged the nature of the Class B stock would increase the voting power of those who hold onto the stock over time. The company created its dual-class stock structure in 1986. But the new B shares dont sit well with every shareholder. â€Å"It had nothing to do with shareholder value and everything to do with voting control, said James Burns, of East Syracuse, N. Y. , money manager J. W. Burns Co. Mr. Burns, who has held Wrigley shares for 18 years, recently cut his stake to fewer than 50,000 shares. At one time, he held as many as 300,000 shares. Wrigleys share structure also acts as a barrier against a hostile takeover of the company by putting power in the hands of long-term shareholders who are unlikely to heed such advances. Such a defense isnt an option for most companies. In the mid-1990s, the NYSE and other stock exchanges imposed rules against dual-class structures that create differences in voting power. But those that already had them such as Wrigley, Viacom Inc. and Hollinger International Inc. could keep them. Now, Wrigley has added 55 million Class B shares to the 33 million already in circulation. To understand how they translate into family control, think in terms of votes, not shares. Before the dividend, Wrigley had 189 million common shares outstanding with one vote each and 33 million Class B shares with 10 votes each for a total 519 million votes. Of that number, Mr. Wrigley, the CEO, controlled 211. 8 million votes, or 41 percent. Other family members had lesser amounts. After the distribution of 55 million new Class B shares, the total vote count swelled to about one billion, and Mr. Wrigleys votes made up 28 percent of the total. Now, assume one-third of the Class B shares are converted and sold in the first year, while Mr. Wrigley holds onto all of his Class B shares. The total vote count would shrink to about 782 million, and Mr. Wrigleys stock would represent 40 percent of the votes outstanding. If a similar thing happened the following year, the vote count would shrink to about 585 million shares, and Mr. Wrigleys stock would represent 53 percent of the total. Theoretically, Mr. Wrigleys control could reach between 56 percent and 60 percent of the votes outstanding. ( Credit to The Wall Street Journal). So investors look at it both good and bad, whether you are in for long or short term makes a huge difference. As mentioned, once you sell your class B shares, the Wrigley family benefits. | |