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American Express USU

1. Which investors would prefer to hold the three pieces of the USU together and which investors would prefer to hold a common share instead? In the long run, which investors might want to hold the base bond only? the IDP? the EAC? USU would be preferred by individual investors with large capital gains in these stocks might be put off by the potential tax liability exchanging their common stock for unbundled units. And someone who is looking for a minimum guaranteed annual return of 5 to 5.5 percent over the 30 years. All this while giving up their shareholder rights. Investors will pay more in total if the pieces of the package are sold separately, the reasoning goes. The pieces in this package are dividends, the potential growth in dividends and the potential increase in the value of the stock itself. - The bond would carry an interest coupon equivalent to the current dividend rate of the stock and would mature at a premium to the current stock price. - The preferred stock would entitle the holder to any increases in dividend payments, compared to the current dividend over the next 30 years. - The stock appreciation certificate would entitle the holder to any capital gain on the stock in 30 years that exceeds the premium allotted to the bondholder. The income component is called the ``prime,`` which stands for ``prescribed right to income and maximum equity`` and the appreciation component is called the ``score,`` or ``special claim on residual equity.`` The three reasons people buy stock - the chance for a price increase, the dividend and the possibility that the dividend will be raised. The 30-year bond will pay interest equal to the current annual dividend. The preferred stock would pay any increase over the next 30 years in the current level of the dividend. The stock appreciation certificate would entitle the holder to buy a share of the company's stock in 30 years for a pre-set price expected to be slightly higher than the face value of the bond. Investors making the swap would be protected against a dividend reduction, since the dividend would become a fixed interest payment. 2. As an investor holding American Express common shares, would you tender for the USU? Why or why not? In general, are shareholders in American Express who do not tender better or worse off if the offering goes forward?

As an investor, I would not tender for the USU. i. It is too complicated for normal investor. ii. The USU holders have no shareholder rights. They will surrender their rights for no immediate gain. iii. Once the shares have been called back and unbundled. The number of shares outstanding will decline causing the share prices to go up. iv. This will be further compounded by increasing EPS and cash flow per share by saving on taxes further increasing the value of the shares, skipping the holders of USUs. v. There is a question as to the liquidity of the USU.

3. Why would a firm be interested in issuing USUs? What type of firms might be most interested in issuing USUs as exchange offers? As public offerings to raise new funds? USUs would give companies a way to reduce the amount of stock they have outstanding without taking on a big debt load as would be required with normal stock buybacks or restructuring. The firm could boost stock prices by calling attention to the reasons people buy stock - the dividend, the chance that the dividend will be raised and the hope that the stock price will rise - and by possibly helping to actually lift its stock price. The share buyback would immediately reduce the supply of stock outstanding and, thus, automatically increase earnings per share. The USU would also improve cash flow because the company replaces dividends paid with after-tax dollars with tax-deductible interest on the new bond. If the pieces of the unit trade for a price higher than the whole common stock, that could increase the market value of the remaining stock outstanding. Because it could work to raise stock prices and also increases a company`s leverage, the unbundled stock unit can be seen as takeover defensive measure.