Spring Cleaning Your Portfolio: Warrants, Spin-offs, Mergers & Acquisitions By Rico Dilello
The financial world has become a lot more complicated with a multitude of engineered investment products beyond just plain stocks, bonds and mutual funds. It is important for investors to review the holdings within their investment portfolio. Keep in mind that your financial advisor may have as many as 500 to 1000 clients which makes it difficult to contact everyone regarding, warrants, spin-offs, mergers and acquisitions.
For example, a friend of mine emailed me with a question regarding General Motors warrants. Apparently, his in-laws got some GM warrants in their investment account as part of a bankruptcy settlement and had no idea what they were. My friend’s mother-in-law had the A & B warrant which had different values.
Key Factors Regarding Warrants
A warrant has an exercise price which allows the owner to exchange one warrant for one share of stock. GM warrant “A” has an exercise price of $10 and “B” at $18.33 which are bargains because the current price of GM stock is around $30.00! In simple terms you can purchase a $30.00 stock for either $10 or $18.33 based on which warrant you own.
Warrants also have expiry dates which forces holders to convert their warrants into stock. Warrant A, expires on July 10, 2016 and Warrant B, expires on July 10, 2019. Most full service and discount brokerage firms will automatically convert the warrant into stock if the exercise price is below the price of the underlining stock on the expiry day. However, if the stock price is below the exercise price then the warrant will expire worthless!
Warrants can be exercised at any time, you don’t have to wait until the expiry day. They are listed on stock exchanges and trade just like stocks. Warrant holders are not eligible to receive any company dividends. You do have the ability to sell your warrant to another investor.
Occasionally you may receive a warrant from a stock that you already own. Some companies will raise capital by selling additional shares and attach a warrant as an added bonus to ensure that investors will buy their shares. Existing shareholders may also receive a warrant so that they too can profit from a future share price increase.
Spin–offs or break ups
Last year, activist investor Carl Icahn managed to convince the board of directors of EBay to spin-off its profitable PayPal division into another company. Mr. Icahn believed that breaking up the company into two would unlock the value of the PayPal division. It is too early to tell if both companies’ share price will increase in price due to the spin-off.
However, sometimes break-ups can be very costly. Ma Bell in Canada spun off its Nortel Networks division many years ago. Bell Canada shares have done very well over the years but Nortel went bankrupt. Not all spin-offs work to increase shareholders’ value.
Mergers & Acquisitions
Mergers and acquisitions have a high failure rate and should never be taken lightly. Not only are you asking two companies to integrate under one corporate mission, but you are bringing together large groups of people with their own personalities, ambitions, behavioural traits and ways of working. The complexity ramps up when multiple branch offices, cross-border IT infrastructure and financial regulation are included.
Without a clear strategy, effective project management and open communication between stakeholder groups, the merger or acquisition will struggle to deliver the desired results. The process must be transparent, realistic and involve all areas of management if success is to be achieved.
Spring is a good time to clean up your portfolio
It is amazing how easy it is to accumulate stuff that you may not want or need. You should always know what is in your investment portfolio. You need to ask yourself or your advisor, do the new shares or warrants meet my risk tolerance. Are they still good investments? If not, time to clean house.
By Rico Dilello