Last year about this time I was doing a sweep of some areas where I'd found Peter Lynch-type companies in the past. In this case, it was one of my favorite searches -- businesses the public thinks are controlled by the mob -- a principle that Lynch discusses in One Up on Wall Street. I like these companies in the same way that I like "sin" stocks -- you know full well that these companies have a strike or five against them when trying to attract shareholders, so they tend to be awfully shareholder friendly.
I nearly fell in love with EZCorp (NASDAQ:EZPW), which runs, of all things, a network of pawnshops, mainly in Texas and the Southeast. It was a tiny company at the time, $40 million market capitalization, P/E of about 5, and some pretty sweet economic fundamentals. It's cheap, cheap, cheap, and compared favorably with its major competitors, Cash America International (NYSE:PWN) and First Cash (NASDAQ:FCFS). I would have loved to write about it, would have loved to discuss it, but I couldn't. That near-love experience turned to horror when I realized that EZCorp had the least shareholder-responsive structure I had ever seen in a company.
We've discussed in the recent past the iniquities of a dual-class structure, where management maintains some non-traded supershares that get voting preferences far larger than their economic positions. Well, with EZCorp, try this on for size:
Since Aug. 27, 1991, the company's class A, non-voting common stock (class A common stock) has traded on the Nasdaq stock market under the symbol EZPW. As of Nov. 21, 2003, there were 132 stockholders of record of the company's class A common stock. There is no trading market for the company's class B voting common stock (class B common stock), and as of Nov. 21, 2003, such stock was held by one stockholder of record.
The stock that trades on Nasdaq is non-voting, and all of the voting power lies with a single shareholder -- an investment banking firm called Morgan Schiff. I've railed on the fact that a Chinese company, Ctrip.com (NASDAQ:CTRP) stated that it isn't required to listen to its overseas shareholders. EZCorp has gone ahead and set that notion in stone. Proxies? Why bother? There's nothing for you to vote on. This is the People's Democratic Republic of EZCorp. Don't like it? The company doesn't care. I wonder if the company's voting structure and its miserable long-term performance are coincidental. Each common share is roughly half of its 1992 price, with no dividends to ease the pain.
Management here might be the most upstanding folks in the world. But when neither the management nor the board ever needs to ask minority shareholders their opinions, one of the most important balances of power in public share ownership is broken. I'm just not interested. A minority ownership position should not be treated as a majority vote, and it certainly shouldn't be worth 100%. I'm stunned that the SEC allows this. Because here's what happens:
Pursuant to the terms of a financial advisory services agreement, Morgan Schiff, an affiliate of the general partner of the majority stockholder, provided management consulting and investment banking services to the company for a $33,333 monthly retainer. These services include ongoing consultation with respect to offerings by the company of its securities, including, but not limited to, the form, timing, and structure of such offerings. In addition to the retainer, Morgan Schiff has earned fees from the company in prior years for other business and financial consulting services related to specific transactions. Morgan Schiff received $33,333 per month from Oct. 1999 to June 2000 for its services as a financial advisor, and waived its retainer from July 2000 to Oct. 2002. Effective Oct. 1, 2003, the monthly retainer was increased to $100,000 per month, inclusive of most expenses.
So, that's $1.2 million in annual retainer fees to an affiliate of the controlling shareholder for consulting and investment banking. That would be fine if this were Intel (NASDAQ:INTC). It isn't. Those $1.2 million in fees are 3.3 times larger than EZCorp's entire fiscal 2003 earnings. Even if you use the more favorable cash flow returns, this will equal a big bite out of the company's financial returns. Could EZCorp not find anyone less conflicted to provide these services? It just looks awful. Were I a shareholder, it would make me sick. It's just another example of a company making itself unpalatable to shareholders, at its detriment.
Fool contributor Bill Mann does not own shares in any company mentioned in this article. For our latest great stock ideas, consider a free trial subscription to Motley Fool's Hidden Gems .
