Certain financial trends seem to resurrect themselves every so often -- but stub equity doesn't seem to be one of them. I guess sometimes, things get buried for a reason.
Stub equity, developed in the 1980s by private equity firm Kohlberg Kravis Roberts, was all set for its big comeback in KKR and Goldman Sachs' Capital Partners'
With stub equity, private investors offer shareholders the option to roll their publicly traded equity into the transaction, maintaining a stake in the company in question even after it goes private. In this case, KKR and Harman hailed the deal's use of stub equity as an opportunity for investors to get the "future upside" they usually miss once a company goes private. As of late last week, however, KKR and GS Capital Partners backed out of the Harman deal, landing stub equity right back in the graveyard.
On its face, the Harman stub equity deal sounded like a good idea. But as I outlined in a previous Fool piece, shareholders risked not getting the same rights as the private equity firms. In addition, the private firm's low liquidity might have made it very difficult for investors to sell their shares.
Stub equity can also be an administrative nightmare for dealmakers. Because it involves an exchange of shares, the private equity firms must file a complicated, time-consuming S-4 form. And since smaller shareholders can participate in such transactions, they're more likely to draw increased SEC scrutiny.
Credit concerns abound right now; banks such as Bear Sterns
Further Foolishness, admit one:
Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 5,691 out of more than 65,000 total participants in CAPS. Everyone has equity in the Fool's disclosure policy.