Way back when in November, 2004, we wrote about FranklinCovey (FC-NYSE), a company that describes itself as "the global consulting and training leader in the areas of strategy execution, customer loyalty, leadership and individual effectiveness."
At that point the stock price was stuck at the $1.75 (U.S.) level, a scant 20 cents above our purchase price. In April, 2006, the share price thrust forward allowing us to eject one-third of our position at $8.84. Since then the value has done a whole lot of backing and forthing. Recently, things got more exciting, as the firm orchestrated a Dutch auction using about $28-million of the $32-million from the sale of their Consumer Solutions Business unit.
The Dutch auction was introduced for stock markets in 1981. It was based on the system used by Dutch tulip farmers in the 17th century, many of whom participated in one of the biggest monetary frenzies in history, the Dutch Tulip Mania, from 1634 to 1637. Then the market imploded and the crash became synonymous with extreme market folly. More famous for the younger generation perhaps is when Google rolled out its shares in 2004 using this methodology.
A Dutch auction specifies a price range at which the shares will be purchased; in the case of Franklin, the bottom end was $9 and the top end $10.50, with shareholders allowed to offer their shares in 25-cent increments. Stakeholders knew that if they offered their stock at $9, at least some of their holdings would be bought. However there was no guarantee all would, for if more shares are tendered than dollars available, then the money would be paid out on a pro rata basis, leaving many people with odd lots of stock. Shareholders who offered above the price where the sale settled would not sell any shares.
Figuring out at what price to offer shares is a fascinating example of game theory and unfortunately, one new to us. As rookies, we looked for info, but that was sadly lacking. So we began as logically as possible for neophytes in a new arena.
First was the question of whether participation was even worthwhile, given that the maximum price possible to receive was $10.50 and our target price for the stock is $11.24. The price Franklin was trading at before the offer came along, which was in the $7.50 range, also was key, as immediately after the auction was announced, the stock jumped to about $8.75, indicating that perhaps the value was inflated. One could surmise that perhaps after the auction, the stock would drop again to around the pre-offer price, dictated by the old supply-demand equation, as well as those people who did not sell wanting to cash in their chips. People who ended up with dribs and drabs also might want to dump.
Further clouding the dilemma of what to do, Georgeson Shareholder Communications was hired by Franklin to actively solicit shareholders to tender. More shares tendered likely meant a lower price. Adding to this diminished valuation possibility was a default factor, for if people offered their shares without stating a price, they would automatically go into the $9 group. On the upside, management stated it would not sell any shares, indicating the price was low.
Examining company fundamentals, selling Franklin seemed reasonable. The turnaround had run its course after moving from losses to profitability, and the firm had taken a step backward, losing money in the most recent quarter. The deal to sell the retail operations would lower future revenues and with a recession in the air, outfits that purchase Franklin's corporate courses might decide that the expenditure was not necessary, or could be delayed.
All of this led to uncertainty at our end. Ultimately we decided to tender at $10, knowing it was unlikely our shares would be picked up. However, we were not willing to settle for less.
In the end, the deal transpired at $9.25 a share, meaning about three million, or about 15.4 per cent of the common shares, were purchased. It will be interesting to see what happens to the share price, currently above $9, less than two weeks after the transaction.
As with most first-time events, this has been a learning experience for us. If and when this situation occurs again, we will certainly be prepared with additional understanding and knowledge. It is unfortunate that comprehension is not instantaneous and one has to play a game, sometimes numerous times, before playing it to an optimal level.
Special to The Globe and Mail