Genzyme proves the old adage, No Good Deed Goes Unpunished
BY EDITOR, MAY 12, 2003
Everywhere we look we see victims. Shareholders want management's head on a platter. Management sincerely tried to do the right thing and - in terms of its effect on future operations - we think made the right decision. But, talk about shoving a stick into the hornets nest!
Some years ago, in a fit of financial engineering, Genzyme Corporation created "tracking stocks" for its Biosurgery Division and its Molecular Oncology division. Those stocks started to trade on the stock exchanges as Genzyme Biosurgery and Genzyme Molecular Oncology. Tracking stocks track sales and earnings. The owners of these stocks have limited, if not non-existent powers over the ruling boards of directors. And they have no claim on the assets (or liabilities) of the corporation. Just earnings. In reality they own stock in divisions of a corporation. In this post Enron era with increased corporate scrutiny, Genzyme's tracking stocks were in the cross-hairs of those who want to restore management and directors accountability to shareholders. So, bowing to the times, Genzyme's board decided to end the tracking stock structure and replace those very cheap shares with shares of the parent organization. So they announced late last week.
One problem. The formula management chose to use, the one that was specified in their tracking stock agreement of many years ago and one that shareholder's were (or should have been aware of), effectively penalized any shareholders who'd purchased shares in the last week. On paper the ruling agreement says 30% premium to the stock price. In practice it is a 30% premium over the last 20 trading days. Coincidentally, for 17 of those trading days, Genzyme Biosurgery stock was at all-time lows ($1.15-1.90 per share) and in the days immediately before this announcement, the stock rose - a lot. The day before the announcement, the stock was at $2.50. Then the announcement. In fact the 30% premium was a 20% discount to the stock's price the day before the announcement.
The howls of shareholder pain were amazing to behold. And, since most became shareholders by way of acquisition, it reinforced the notion that management was unresponsive to shareholder concerns.
As we said earlier, we see victims throughout this story.
Our take on it is based on the operations of the Genzyme Biosurgery. Generating $250 million in revenues and losing $34 million per year and with the capital markets essentially closed to the company because of its financial structure, the company was in desperate need to simplify its corporate life, clean up the capital structure and get back to running the business. In that context we think this decision is right one.
But what Genzyme Biosurgery will or can do for its tracking stock owners is a dilemma. Yet another distraction.
