LEVERAGED FUNDING As part of the total package for its $4.35 billion acquisition of Sperry Corp, the Burroughs Corp plans to raise $250 million of capital via an issue of money market preferred stock.
The money market preferred, invented by Shearson Lehman Brothers in 1984, is a perpetual preferred that gets priced every seven days by Dutch auction. This competitive pricing technique tends to result in a lower yield than the comparable short-term paper. Essentially, the money market preferred is a preferred stock with a floating dividend that is viewed by the rating agencies as permanent equity capital. Given its equity status, its use as an acquisitions vehicle in highly leveraged transactions is likely to increase.
The primary investors in money market preferreds are corporations elegible for the 85% divided exclusion. On as issue yielding 5%, for example, the corporation pays out only 7.5% of the dividend in taxes; the effective after-tax yield is thus sufficiently high that corporations are prepared to accept the lower rate because rates on a comparable taxable instrument would have to be substantially higher to match this return. One reason some corporate investors sometimes shy away from the money market preferred is that, as a stock, it is likely to prove more vulnerable to an issuer's financial vicissitudes than a comparable debt security.