Usu Valuation

HW4 Luoxi Zhang

In late 1988, the bankers at Shearson Lehman Hutton Inc. created a flurry of publicity as they announced the planned offering of $5.6 billion of new "Unbundled Stock Units" in offerings by four firms. Excerpts from one of the four prospectuses is attached. In this proposed exchange offer, American Express (the parent of Shearson Lehman Hutton, Inc.) offered to allow its common shareholders to exchange common shares for "Unbundled Stock Units" or USUs.

Each USU could be separated into three different parts: one "Base Yield Bond," one "Incremental Dividend Depository Preferred Share (IDP)" and one "Equity Appreciation Certificate (EAC)." The proposal was that each of these three parts would trade separately and be listed on the New York Stock Exchange.

When the USU proposals were announced, they were the subject of hundreds of articles and analysts' reports, as bankers, corporations, investors, and financial writers tried to understand what the proposal entailed, whether the USUs were fairly priced, and whether this was the wave of the future. USUs were hailed as revolutionary, leading one writer to suggest that the security could "change the structure of public ownership of American corporations." Others were more critical of the proposals.

Please analyze the USU proposal. Assume that American Express proposes an exchange of one share for one USU.

1. Describe and analyze each of the three separate pieces of the USU. How do they relate to other securities we have studied this term?

It offers to exchange up to 60 million of its common shares (par value = $0.6 per share) to USU. Each USU consists of

1. $75 principal amount of Base Yield Bonds

* bears interest from 1989 and due in 2019

* quarterly interest payment equals to current quarterly dividend, which is $0.21

* same expire date as EAC

* redeemable by the company at $75 plus accrued and unpaid interests

2. 1 Incremental Dividend Depository Preferred...