'Times Mirror Company Peps Proposal Review' and 'Financial Engineering and Tax Risk: The Case of Times Mirror Peps'
Posted: 27 Jun 2000
Date Written: April 16, 1996
SUBJECT AREAS: investment banking; Risk management; Securities; Taxation CASE SETTING: 1995-1996, United States, Industry Setting: media/software
Times Mirror Co. (TMC) owns a substantial block of Netscape common stock purchased prior to Netscape's IPO, on which it has substantial unrealized gains. TMC is restricted from selling the stock in a public offering, and is therefore considering a proposal by Morgan Stanley to issue Premium Equity Participating Securities (PEPS) to monetize its Netscape holdings. These PEPS would pay interest quarterly and be redeemable in five years at a price tied to the value of Netscape shares, subject to certain formulas and call provisions effectively apportioning the upside in Netscape stock between TMC and the PEPS investors. The tax treatment of the PEPS, while unclear, is of significant importance.
Teaching Purpose: The case can be used in a variety of context. At a methodological level, it permits students to work from prospectus to payoff diagrams to functional descriptions of the PEPS security to valuation. This discussion touches upon the credit risk in corporate equity derivative transactions. The substance of the case allows students to explore the use of functionally-equivalent financial strategies to carry out a tax-efficient disposal of appreciated stock. The associated note details the notion that financial engineering is often done in tandem with legal engineering, and provides specific background on the taxation of equity linked securities.
Note: "Times Mirror Company PEPS Proposal Review," (with Cameron Poetzscher) and "Financial Engineering and Tax Risk: The Case of Times Mirror PEPS" (with Cameron Poetzscher and Robert Santagelo)
JEL Classification: G30
Suggested Citation: Suggested Citation