It may look like a zero-sum game, but it's actually not. On March 17, Pre-Paid Legal
The instantaneous 360-degree spin won't matter to investors, unless they happen to hold fewer than 100 shares in the legal services provider. The move will effectively force all of Pre-Paid Legal's odd-lot investors to be cashed out. There won't be many. The company expects to repurchase only about 205,000 shares in the process, which should cost about $7.4 million based on yesterday's closing price.
So is Pre-Paid sticking it to the little guy, or is it making a shrewd yet sound cost-cutting decision? It costs as much for a company to service small investors as it does for its larger shareholders. The printing and shipping of annual reports and other corporate communications alone finds some companies shelling out a few bucks a year on each shareowner. Shaking smaller stakeholders out may make sense in that regard, even though the Internet is providing companies with a more cost-effective digital way to reach many of its investors.
Usually, obscure penny-stock companies like Detwiler, Mitchell, Mercury Air Group
Larger companies have come up with other ways to shake out small-fry shareholders. A few years ago, Disney
Other companies have tiered perks. Amusement park operator and Motley Fool Income Investor newsletter pick Cedar Fair
So where does this leave Pre-Paid Legal? The move will save the company a little pocket change in the long run, but it's a lot like washing your car halfway through a drive along a muddy road. Come March 18, odd-lot investors will come trickling back.
I also don't like the message that the company is sending. If you have less than $3,592 riding on Pre-Paid, you're better off dead to the company? That's not right. Next you'll see companies doing 1-for-1,000 reverse-forward splits and 1-for-10,000 reverse-forward splits. Institutional investors matter, but smaller retailer investors do, too -- especially for consumer-based companies, where spurning Granny May and her 78 shares may drive away an infuriated customer.
There was a time when companies encouraged small investors to become larger ones, gradually, through dividend reinvestment plans. That's the way it should be. Let's hope Pre-Paid's move doesn't catch on.
Longtime Fool contributor Rick Munarriz is an odd-lot investor in a few companies, Disney included. He is also an investor in Cedar Fair.The Fool has a disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.