A testing time for US transfer agents
Astronomer Carl Sagan was wont to rhapsodize about the cosmos in hyperbolic terms of millions and billions, then offer up some everyday comparisons so mere mortals could understand just how big he was talking. We could use his help now in assessing the expanding universe of shareholders.
When Metropolitan Life Insurance Co goes public this quarter, it may be the largest-ever IPO in the US. The demutualization will see about $6.5 bn in stock distributed to as many as 11 mn MetLife policyholders, transforming a measurable chunk of the US population into shareholders overnight. How big is that? Lucent Technologies – which has actively grown its individual shareholder base since spinning off from AT&T in 1996 to become the most widely held US company – only has 4.6 mn, while AT&T itself has about 3.7 mn. The number of individual Microsoft holders has grown faster than the company can keep track of, but even then it's only at about 3 mn.
Then there's Prudential, with around 12 mn holders, and John Hancock Mutual Life Insurance Co with about 3 mn, adding dramatically to some 24 mn shareholder accounts already serviced by Equiserve, their transfer agent. ChaseMellon Shareholder Services practically doubles the number of accounts it services in taking on the MetLife job. And all that's on top of the transfer agents handling giant mergers like Bell Atlantic and Nynex or SBC and Ameritech.
To fathom the volume of shareholder communications involved demands an astronomer's mind. As Sagan would have said, stack all of MetLife's 360-page information packages one on top of another and you would reach...further than any IRO can imagine.
One of the first steps in the grueling demutualization process is choosing a transfer agent. And considering the scope, there aren't many to choose from. 'It comes down to a choice among a narrow band of three transfer agents – Equiserve, ChaseMellon or Bank of New York. For any other transfer agent it would dominate their shareholder population,' comments David Pitou of Stockholder Consulting Services. 'There's a major task in front of them – building the software, personnel, and physical space to take on 10 mn new accounts. The problem is ensuring the company's policyholders know how to be shareholders. The mailing alone is a big, big hurdle, and the phone action will be very heavy at the outset – that goes with the territory.'
North American transfer agents tackling these huge distributions would do well to look to the UK for inspiration. When Computershare – then Royal Bank of Scotland Registrars – was hired by Halifax for its demutualization in 1997, it faced upwards of 10 mn new shareholders, and wound up servicing 7.5 mn – a number that actually dropped quickly in the wake of demutualization. 'On day one it's massive, but then the register starts to reduce fairly quickly as many first time shareholders immediately convert their holdings to cash,' recalls Tom Morrison, chief registrar for Computershare.
That phase is important, Morrison explains, because there's large institutional demand for those shares sold by policyholders in the early days. This is particularly so for companies large enough for the FTSE-100 or S&P 500, whose stocks are scooped up by index funds. 'You need to model what might happen and work with the client and the banks to understand what the liquidity may be in the early stages.'
At the same time, a Halifax or a Prudential wants to keep a large number of retail holders. After all, those are their customers. Says Morrison: 'It's in the shareholder's interest for the company to be successful, and to buy from the company in which they're a shareholder. It makes perfect sense.'
Another lesson learned in the UK is that the clarity of any communication sent to millions of individuals is crucial. 'You have to keep it simple,' Morrison sums up. 'Many may not have held equity investments previously. If you can't actually communicate with them in a very clear and straightforward way, it will generate calls to both you and your client.' Even if 1 percent of 7.5 mn people call, that's still a lot of calls, he adds.
Computershare 'ring-fenced' the Halifax job to avoid disrupting the service its other clients received. 'Once the initial flurry and special work eases down, you're then in a position to integrate it into your business,' he says. Similarly, when ChaseMellon launched the MetLife distribution in late November, 75 semi-trailers and 5 mn pieces of mail a day started rolling out of the 460,000 square foot Long Island premises of ADP Investor Communications Services, which is sub-contracting.
Luckily the transfer agents look equal to the tremendous task at hand. The latest transfer agent comparison report from Stockholder Consulting Services shows an uptick in overall performance, though an exception was highlighted with a new question about automated phone systems – a sticky area for any business. Another study by Group Five reveals that customer satisfaction has remained almost unchanged at 72 percent, and president Jack Sunday is not overly enthusiastic: 'The account administrators appear to be getting the job done,' he admits. Pitou points out that about 29 percent of companies said they're considering changing their transfer agents.
Demutualizations aside, Pitou reckons transfer agents face even greater change following the repeal of Glass-Steagall, allowing banks, brokers and insurers to enter each others' businesses. Until that development it's been a static industry that wasn't really going anywhere – no new entrants to the field in 30 years, a lot of consolidation, and the balance between registered and street-name beneficial owners tipping in favor of the latter.
With the barriers down between financial services, the transfer agents are extremely well positioned. 'One of their great advantages that nobody else has is an entree to the executive suites of 10,000 US companies,' Pitou says, confirming that every company must have a transfer agent function and 96 percent outsource.
Pitou envisions a public company, even a small or mid-sized one, being able to offer a range of services to its shareholders and employees, from stockholding information and direct stock purchase plans to credit cards, brokerage accounts, insurance and banking. 'It'll be the ABC Company Financial Services Page.' asks Pitou. 'Transfer agents are already in the corporate secretary's office every day, so why not exploit that?'
Of course many transfer agents are not part of big banks, aren't thinking of cross-selling, and are happy to stay that way. 'We're doing nothing but providing stock transfer service, more focused than the banks that are involved,' says Michael Karfunkel, president of American Stock Transfer & Trust Co. Karfunkel's firm moved into first place among medium-size transfer agents in the latest Group Five shareowner services corporate satisfaction study, though it now services more than 3 mn shareholders and around 3,000 companies which nudges it into the large agent category for next year.
Karfunkel is conscious of the need for transfer agents to try and maintain registered shareholders in the face of street-name growth. 'They're still a very important asset,' he says. 'Generally the registered shareholders are the long-term ones, whereas street-name holders are there for a quick buck. Plus, with information dissemination, the big problem with beneficial shareholders is that by the time it gets to them it's almost stale. For timeliness, you have to be a registered shareholder.' He adds that direct stock purchase plans are enjoying steady growth. 'People are now figuring out that they can be just as smart as a mutual fund manager.'
Certainly the likes of MetLife and Prudential would do well to make the most of their legions of registered shareholders. As Computershare's Morrison points out, they're customers as well, meaning the shareholder register makes for a good marketing database. 'If they hold shares, perhaps they're interested in acquiring more shares in other companies. Or they may have shares they want to sell. It gives the company a more targeted market.' Referring back to the careful planning involved in a large demutualization, Morrison concludes, 'Registrars and transfer agents may not be seen to be at the glamorous end of the market, but we deal with these things, so we tend to understand them better than most people.'