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.