Four major companies - American Express Co., Dow Chemical Co., Pfizer Inc. and Sara Lee Corp. - abandoned plans last week to offer new securities known as "unbundled stock units" after a regulatory setback.
The unbundled stock units, or USUs, were created by Shearson Lehman Hutton Inc. and unveiled on Dec. 5, 1988. At that time, the four companies agreed to let Shearson exchange some $5.6 billion in common shares for the new USUs.The new securities, developed in strict secrecy and introduced with much fanfare, would have separated a share of common stock into three different securities - a bond, preferred stock and warrants.
But late Tuesday, Shearson and Goldman, Sachs & Co., enlisted by Shearson to market the new securities, recommended to the four blue-chip companies that they withdraw registration statements filed with the Securities and Exchange Commission to exchange their common stock for USUs.
Shearson said the recommendation was made after it was notified Tuesday by the SEC that, for accounting purposes, the unbundled stock units would be included in total shares outstanding in determining earnings per share.
"In effect, the unfavorable ruling from the SEC denies an exchanging company the anticipated increase in earnings per share associated with the buyback," Shearson said.
"The SEC staff's interpretation is contrary to the conclusions reached by the five accounting firms involved in the transactions as well as the staff of the Financial Accounting Standards Board," the investment bank said.
When the new product was introduced, Shearson said it would enable corporations to assume less debt than they would with conventionally financed stock buybacks and provide investors with additional investment flexibility.
In addition, Shearson maintained that by exchanging USUs for common shares companies could have lowered their cost of capital, increased earnings per share and maintained high credit ratings.
"We are particularly disappointed in the commission's decision, given the apparent resolution of the one share-one vote issue and the increasingly favorable response the exchange has received from the marketplace," Ron Gallatin, a Shearson managing director and inventor of the USUs, said.
"We are disappointed that we will not be able to incorporate this new financial instrument into our stock repurchase program," said Howard L. Clark Jr., executive vice president and chief financial officer of American Express.
"At the same time, we applaud the innovative, creative efforts that Shearson put into the project," Clark said. Shearson is an American Express subsidiary.
Enrique C. Falla, Dow Chemical's financial vice president, also expressed his disappointment over the SEC position but said Dow's current 10-million share stock repurchase program would continue unabated.
Edmund T. Pratt Jr., chairman and chief executive officer of New York-based Pfizer, said the SEC position was "contrary to the advice we had received concerning precedent and current accounting standards."