In my 49 years of investing, including a 30-year institutional investment career, I cannot recall seeing such a convoluted, contrived, shareholder-unfriendly corporate action. What started last year as a simple sale by PPG (PPG) of its commodity chemicals business to Georgia Gulf (GGC) for $2.1 billion has become a complicated, uncertain exchange offer - one in which PPG shareholders act as Georgia Gulf's financiers by exchanging their PPG shares for newly minted GGC shares on uncertain terms.
This offer, besides being confusing, is disingenuous, enticing PPG shareholders with a specious 10% discount on the new GGC shares. This "free money" comes from the pockets of the GGC shareholders through dilution. Worse, the 10% probably will shrink or disappear once the new, bloated GGC (with twice the number of shares outstanding) begins trading. This shrinkage will be exacerbated by short-term traders looking to take advantage of a hoped-for quick pop.
Substituting gloss for substance
Georgia Gulf's management has been attempting to make their deal look exciting through wordplay and the adoption of a new company name: Axiall.
From the new Axiall website:
Welcome to Axiall Corporation, the new industry leader created by the pending merger of Georgia Gulf and the commodity chemicals business of PPG.
With enhanced vertical integration and portfolio diversification, Axiall emerges as a Fortune 500-size company with tremendous growth opportunities. Axiall represents a new kind of chemistry company; one that responsibly harnesses applied chemistry to solve common problems, improve every-day life and drive human progress.
Cautionary note: When management uses superlatives to describe an uncertain future (e.g., "enhanced vertical integration," "tremendous growth" and "drive human progress"), we know they are wearing rose-colored glasses or trying to sell us something.
Risk offsets opportunity
The size of the deal to GGC and the unknown results make this offer risky. A positive payoff will occur only if GGC's management successfully blends the PPG business into its operations. Based on previous merger/acquisition results, the dream of "synergy" from such a deal often becomes the reality of "mediocrity" or the nightmare of "dysfunction." Think of Axiall this way: A cumbersome combination of GGC's operations (non-noteworthy, judging by its past stock price performance) and PPG's castoff chemical commodity operation (and make special note of that uninspiring "commodity" descriptor).
But, let's say everything does work out. Given Georgia Gulf's history, it will take many quarters of steadily improving sales/earnings reports to prove the new trend to investors. Therefore, we may expect to see many buying opportunities along the way.
Bonus insight: PPG management's actions say "Sell"
The complexity and uncertainty of the exchange offer, combined with the foisting of that decision onto shareholders, reflects poorly on PPG's management. Their actions show a willingness to ignore shareholder interests in order to effect a deal. (The same can be said about GGC in its willingness to dilute their current shareholders' ownership.)
Regardless of a company's strength and outlook, when management forsakes its shareholders to make THE DEAL, it's time to jump ship. The stock market abounds with well-managed companies, so we needn't (and shouldn't) stay aboard.
PPG and GGC stock action supports the sell-and-move-on strategy
Over the long-term, PPG has been an attractive stock, providing good returns with acceptable volatility. Not so GGC. Aside from a runaway burst 10+ years ago, it has been a long-term loser. It's doubtful that this acquisition and name change will alter that characteristic.
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(Stock charts courtesy of StockCharts.com)
The bottom line
Besides saying "NO" to the exchange offer, PPG shareholders should consider selling and reinvesting in a well-run, shareholder-friendly company. Yes, PPG has been a rewarding investment, but that means we get to sell near its all-time high. Might PPG continue to rise? Of course. But that possibility exists for all investments and past performance is no reason to hang on - particularly when management is not in top form.
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(Stock chart courtesy of StockCharts.com)
For more exchange offer detail visit PPG's Investor website, which includes three items: (1) Press release, (2) Prospectus, and (3) Pricing information.
Additional disclosure: Just sold PPG. Positions held: Long U.S. stocks.