Betting on Death

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When Macau gambling mogul Stanley Ho was rushed to the hospital recently, news accounts of the 87-year-old's well-being were swamped by speculation about who would take over his SJM Holdings and how his illness (or death) would affect the Macau market.

So much for the financial world's get-well card to the man who has dominated Macau gambling for four decades. Although it isn't traded in the U.S., SJM is traded on the Hong Kong Stock Exchange, giving adventurous American investors a chance to bet on potentially significant changes.

But investing in China isn't your only option. Several gambling companies in the U.S. have elderly shareholders and/or top executives holding large stakes in their respective companies. Their health and succession planning could affect investors' strategies in the near future.

Las Vegas Sands (NYSE: LVS), MGM Mirage (NYSE: MGM), Boyd Gaming (NYSE: BYD), and Dover Downs Gaming & Entertainment each has someone over 75 dominating its enterprise. Shares of several other gambling companies are firmly rooted in the hands of younger executives and/or family members.

Given the wonders of modern medicine, 75 may be the new 60. And we at The Motley Fool wish extended good health to all executives. However, we can't speak for hedge fund managers and corporate raiders. With gambling companies reeling from heavy debt and diminished share prices, the investing sharks might pounce if they detect a leadership vacuum when a key shareholder or executive dies or becomes ill.

Concentrated control
Read the 10-K or 10-Q statements that these companies file with the SEC, and you'll notice that they cite as one risk factor the concentration of shares in the hands of one person or a few people.

Some companies are designated as a "controlled corporation" because someone has more than half of the voting power. One example is Dover Downs, thanks to the stock ownership of its chairman, Henry Tippie, 82. Given his voting power, the company says, "stockholders may have no effective voice in our management."

Las Vegas Sands is effectively controlled by Sheldon Adelson, the chairman and CEO. He, family members, and family trusts own about 52% of common stock excluding unexercised warrants. Adelson recently turned 76.

Adelson is a youngster compared to Kirk Kerkorian, 92, who owns 37% of MGM Mirage through his Tracinda Corp. Another prominent player is William Boyd, 77, who is executive chairman of Boyd Gaming. Boyd and family members hold 37% of the company's shares.

Making the transition
I'm sure that these executives and shareholders have all done their estate planning, and I hope their companies have firm executive succession plans. Still, questions about future leadership and future strategy should keep the gambling industry busy -- and investors wary -- for the next few years.

Sometimes, baton-passing following the death of a top executive appears to go smoothly. When Bernard Goldstein, chairman of Isle of Capri Casinos (Nasdaq: ISLE) died in July at age 79, the company and a large plurality of shares remained in family hands.

The company's 10-K, issued a few weeks before Goldstein's death, notes that family members and family trusts control about half of the company's stock. One of his sons is vice chairman and another is a director. A new chairman hasn't been named yet.

Contemplating a takeover
Having a lock on the stock doesn't immunize a company from someone else's takeover dreams.

Take Ameristar Casinos (Nasdaq: ASCA), whose longtime chairman and CEO Craig Neilsen died in November 2006. Neilsen's estate put his controlling stake into a foundation administered by the company's two co-chairmen, one of whom is his son Ray.

That didn't dissuade Pinnacle Entertainment (NYSE: PNK) from buying Ameristar shares, hoping to eventually make a takeover bid even though the foundation held 55% of Ameristar's stock. Pinnacle was counting on the foundation diversifying it holdings.

Pinnacle kept its purchases of Ameristar stock below a level that would have required the company to declare its intentions in filings with the Securities and Exchange Commission. By mid-2008, Pinnacle dropped the idea, citing the deteriorating economy and credit markets. In the second quarter of 2009, Pinnacle finally sold all of its 1.2 million Ameristar shares, or about 2% of Ameristar's outstanding shares.

Betting on health
When people invest in a company, the skills and track record of the CEO are part of their consideration. And when the CEO's health becomes an issue -- as has been the long-running mixture of fact, rumor, and guesswork involving Steve Jobs at Apple (Nasdaq: AAPL) -- investors get nervous and speculators get ready.

Actuarial tables remind investors that changes could be coming soon to several gambling companies. You can admire a CEO for his vision and his drive. You can even acknowledge the executive's ego -- for better or worse -- that pushed a company to where it is today. But before you invest, just remember that the CEO isn't immortal.