Commentary. David Pauly is a columnist for Bloomberg News. The opinions expressed are his own.
By David Pauly
New York, May 23 (Bloomberg) -- Corporations supposedly are created for the benefit of their shareholders. Why is it that investors often get suckered into buying shares of companies built essentially for bondholders?
Examples: WorldCom Inc., Tyco International Ltd., AOL Time Warner Inc., Viacom Inc. and Qwest Communications International Inc.
Those companies grew precipitously by takeover and merger -- piling on debt in the process. Recession and their own too- exuberant expansion have stripped these outfits naked. Corporate profits have fallen, and for some of the companies, that means losses deepened.
Time has brought other problems: WorldCom's telephone and Internet services proved to be low-priced commodities. Tyco was a conglomerate that decided in January to split up and then in April reversed strategy again. AOL Time Warner and Viacom showed that the cross-selling of combined companies' merchandise was a trumped- up excuse for expanding empires.
Stockholders who thought they would share in those companies' successes have been flummoxed.
Gloomy Prospects
WorldCom shares have plummeted to a measly $1.65 from a record $62 in mid-1999. Tyco stock has fallen 61 percent just this year. Viacom shares have dropped only 36 percent from their 2000 high, and actually are up 9 percent this year. Its shareholders simply haven't caught on yet.
Bondholders stand to get their principal back if they hang on to their securities until they mature. Twice a year, bondholders also have been collecting interest payments on those companies' huge debts.
Last year, AOL Time Warner paid $1.38 billion in interest, and Viacom shelled out $973 million. Neither paid dividends to shareholders.
Prospects for shareholders in bondholder companies remain gloomy. WorldCom is looking for $5 billion in new loans to keep its phones open. What's more, the U.S. Securities and Exchange Commission is investigating WorldCom's accounting and its $408.2 million in loans to recently dumped Chief Executive Bernard Ebbers.
Losses
AOL -- the Internet, publishing and entertainment giant -- lost $54.2 billion in the first quarter after writing down the value of its 2001 takeover of Time Warner. AOL cheerleaders say the writedown doesn't hurt the company, because the deal was for stock -- no sympathy for AOL stockholders who have seen their investment drop 81 percent since December of 1999.
Viacom, which owns CBS and cable TV networks, took a milder dose of red ink in the first quarter, reporting a $1.1 billion loss after reducing the value of its Blockbuster video chain by $1.5 billion.
Tyco, though big in electronic connectors and security systems, is desperately trying to solve short-term financing needs by selling or spinning off its CIT finance arm, which it bought just last year.
Qwest Communications capitalized on its overrated U.S. fiber- optic network to acquire a once-solid local phone company, U S West Inc., two years ago. It has reported losses every quarter since. The company's debt increased by about $5 billion in the 12 months ended March 31. Qwest hopes to reduce its overall debt by selling its yellow-pages business.
Half Price
This isn't to say bondholders of those companies have been unscathed. WorldCom fixed-income securities are trading at less than half their face value.
Bondholders wouldn't be happy if, in the worst case, a debt- ridden company went bankrupt. But they'd still have a call on a company's assets ahead of stockholders. They might even end up with all the shares in a reorganized company, the stockholders getting wiped out.
Intelligent use of debt is a staple of finance. But bondholders should be bankers, not the chief beneficiaries of a company's business. And that's what expansion-bent companies mad for debt have made them into.