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The T. Rowe Price Small-Cap Value Fund was a no-load fund, which means that there was no direct
sales charge associated with investing. However, the fund charged a 1.0% redemption fee to
investors who redeemed their shares in less than one year. This fee was payable to the fund, and
served to compensate the long-term investors for the transactions costs imposed by the buying and
selling of short-term investors. The fund did not charge a 12b-1 fee.3
The fund was marketed to investors through four primary channels:
1) Many investors purchased the fund directly from T. Rowe Price, using the mail, telephone,
or on-line web site.
2) Another large block of investors purchased the fund through the mutual fund supermarkets
of brokers such as Charles Schwab and Company. Brokerage firms typically expected
mutual funds to pay approximately 1% of the daily net assets invested in the funds by the
mutual fund customers.
3) Other investors purchased the funds through employer sponsored retirement plans such as
401-k plans.
4) T. Rowe Price also offered an advisor class for the fund. The advisor class was also a noload fund that had no initial sales charge, but that charged a higher management fee. This
additional fee was paid to investment advisors who placed their customers in the fund.
employees who have been relocated or who are on temporary assignment, apartment community
managers seeking to provide furnished apartments and individual residents seeking to rent
furnishings for their own homes and apartments.
The "rent-to-rent" business is differentiated from the "rent-to-own" business primarily by the
terms of the rental arrangements and the type of customer served. "Rent-to-rent" customers
generally desire high quality furniture to meet temporary needs, have established credit, and pay
on a monthly basis. Typically, these customers do not seek to acquire the property rented. In the
typical "rent-to-rent" transaction, the customer agrees to rent merchandise for three to six months,
subject to extension by the customer on a month-to-month basis. By contrast, "rent-to-own"
arrangements are generally made by customers without established credit whose objective is to
acquire ownership of the property. "Rent-to-own" arrangements are typically entered into on a
month-to-month basis and require weekly rental payments.
The rent-to-rent segment of the market was highly competitive. The primary competitors for Cort
are Aaron Rents, Globe Business Resources and Brook Furniture Rental.
The Buyout Offer
Corts management was attempting to take the firm private in a leveraged buyout transaction backed
by the firm of Bruckman, Rosser, Sherrill & Co. (BRS) and by the venture capital division of
Citigroup, Citicorp Venture Capital, Ltd. (CVC). In a leveraged buyout, the buyer borrows the
majority of the purchase price to buy all of the publicly held stock in the company. The assets of the
purchased company serve as security for the loan. This is similar to the process of purchasing a
home in which the purchased asset the home -- is collateral for the loan used to make the purchase.
In this case, the existing management would increase their stake from 6.6% to about 16.5%, while
the buyout partners would own the rest of the equity. Citicorp already owned 44% of the common
equity.
At first glance, the offer looked great to the shareholders. The purchasers claimed to be offering $28
per share for the company through a combination of $25 in cash and a share of preferred stock with a
par value of $3.00 per share.4 This was almost 50% more than the recent market price and
represented an increase from managements first offer. Details of both management offers are
shown in Exhibit 5.
4 Preferred stock is a special class of common stock that generally pays a fixed dividend that does not increase or
decrease over time. The shares are called preferred because the preferred dividend must be paid before the common
shareholders receive any dividends. Preferred shares typically carry no voting rights as long as the promised dividends
are being paid. Preferred shares are a type of hybrid security that is in between debt and equity. In times of financial
hardship, firms can suspend payment on their preferred shares without running into the same type of legal trouble that
would happen if the firm stops payment on its debt securities.
For common shares, the par value usually has no economic relevance. However, for preferred shares, the par value is the
base upon which the dividends are calculated on a percentage basis, as well as the price the company would have to pay
to retire the stock if it wanted to do so. Furthermore, the par value for a preferred stock reflects the payment that
preferred shareholders would receive in a liquidation after all other debts have been paid. In a liquidation, common
shareholders receive what is left, if anything, after all of the other claimants, including preferred shareholders, have been
paid in full. If there are insufficient funds, the preferred shareholders may receive less than the par value of the shares.
However, upon further examination there were some questionable aspects to the deal. Institutional
Shareholder Services (ISS) had come out against the deal.5 Although the preferred shares promised
a dividend of $0.30, the stock would not be listed on any exchange. As such, it would be difficult
for investors to buy or sell the preferred shares, lowering their value.
In a typical management buyout situation, the board of directors of the firm appoints a fairness
committee to independently value the company to make sure that the shareholders receive full
value. Cort appointed two of its own directors Keith Alessi and Gregory Maffei to be on that
committee. Neither Alessi nor Maffei worked for Cort and were considered to be outside
directors. Exhibit 6 shows Corts Board of Directors. Messrs. Alessi and Maffei retained
SunTrust Equitable Securities (STES) to examine the proposed buyout and issue a fairness
opinion regarding its price. As part of their analysis, STES examined what the value of Cort would
be at varying offer prices. STES also conducted similar analyses relative to the current market
values of several comparable firms. Some of that analysis is shown in Exhibit 7.
In addition, the compensation committee of the board of directors had just issued large golden
parachutes to the management team that would pay management $3.5 million if and only if the firm
was purchased. There were concerns that this arrangement created a financial incentive for
management to complete the deal, even if the deal were not in the best interests of the shareholders.
BRS was guiding management through the complicated merger process and had helped secure $225
million in financing from NationsBanc to pay for the merger. For their help with the process,
management and CVC would pay BRS a $3.4 million fee when the buyout was completed as well as
give BRS a management contract worth $1 million annually.
To make matters even more complicated, one of Corts primary competitors, Brook Furniture
Rental, had entered the picture with backing from the buyout firm of Fremont Partners. Brook was
offering $28 in cash. Nevertheless, the Cort board was still recommending that Cort shareholders
accept the management proposal.
5 Institutional Shareholder Services, Inc., is an independent company which analyzes proxies and issues voting
recommendations for its clients. This helps institutional investors decide how to vote.
Exhibit 1
50
40
30
10
0
01 Jan 97
01 Jul 97
01 Jan 98
01 Jul 98
date
01 Jan 99
20
01 Jul 99
Exhibit 2
Exhibit 2 - continued
August 5, 1996 - Cort acquired certain assets of AFRA Enterprises, Inc. and Apartment Furniture
Rental Associates for $9,384,000.
December 3, 1996 - Cort acquired the furniture rental contracts and certain other assets of Bel Style
Corporation. Bel Style, a privately owned company, had annual rental revenues of approximately
$2.5 million. Terms were not disclosed.
March 6, 1997 - Cort acquired the stock of each of Levitt Investment Company and McGregor
Enterprises, Inc. and certain assets of Alco Trade Show Services, Inc.
November 1997 Cort acquired the furniture rental contracts and certain other assets of Delta
Furniture Rentals Inc.
March 1, 1998 - Cort acquired the furniture rental contracts and certain other assets of IS Furniture
Rental Corp.
August 14, 1998 - Cort announced completion of the acquisition of Instant Interiors Corporation.
March 26, 1999 Cort announced plans to go private in a buyout backed by Citigroups venture
capital division and New York based Bruckman, Rosser, Sherrill & Co. Shareholders offered $24
cash plus $2.50 of preferred stock.
August 13, 1999 Cort announced it was raising its buyout offer. Shareholders offered $25 cash
plus $3.00 of preferred stock.
Sources: Reports published by The Investext Group and articles from the Washington Post
Exhibit 3
1995
1996
1997
1998
379
6,019
3,973
103,741
31,044
-3,814
24,752
$173,722
$ 123
11,011
4,224
147,161
35,667
-3,815
45,198
$247,199
$ -13,521
4,127
164,323
38,777
-3,183
53,910
$277,841
$ 703
14,585
5,918
189,059
43,861
3,000
3,048
72,722
$332,896
$ 3,597
5,761
19,096
5,425
53,800
10,622
98,301
$ 4,157
7,184
27,491
7,174
65,600
10,441
122,047
$ 5,551
7,978
27,936
9,239
63,132
14,673
128,509
$ 3,417
9,581
21,076
11,541
90,800
20,819
157,234
104
67,383
7,934
75,421
$173,722
127
101,155
23,870
125,152
$247,199
129
103,007
46,196
149,332
$277,841
131
105,940
69,591
175,662
$332,896
Stockholders Equity:
Common stock, voting, $.01 par value
Additional paid-in capital
Accumulated earnings
Total stockholders' equity
Exhibit 4
1995
1996
1997
1998
$141,988
37,321
179,309
$191,560
42,589
234,149
$237,212
50,006
287,218
$265,871
53,093
318,964
Operating costs:
Cost of furniture rental
Cost of furniture sales
27,950
22,203
36,958
25,207
45,634
30,257
47,863
32,354
72,379
95,204
114,674
128,710
16,724
662
12,670
152,588
26,721
15,917
22,722
961
17,649
198,701
35,448
8,251
27,747
1,546
21,052
240,910
46,308
8,374
32,496
1,935
22,959
266,317
52,647
7,837
10,804
4,586
6,218
27,197
11,261
15,936
37,934
15,608
22,326
44,810
18,907
25,903
4,143
$ 2,075
-$ 15,936
-$ 22,326
2,508
$ 23,395
$ 1.26
0.62
$ 0.64
$ 1.40
-$ 1.40
$ 1.74
-$ 1.74
$ 1.99
0.19
$ 1.80
6,688
11,416
12,804
13,019
$ 1.11
$ 1.31
$ 1.67
$ 1.92
0.55
$ 0.56
-$ 1.31
-$ 1.67
0.19
$ 1.73
7,578
12,144
13,378
13,491
Exhibit 5
58.2%
60.0%
87.6%
-44.8%
$302.82M
Management Buyout #2
Date:
17.9%
17.9%
98.2%
-41.7%
$328.24M
11
Exhibit 6
Paul N. Arnold
Bruce C. Bruckman *
Michael A. Delaney *
Charles M. Egan
Gregory B. Maffei +
James A. Urry *
*
+
12
Exhibit 7
24.50
25.50
26.50
27.50
28.50
1.4*
1.4
1.5
1.5
1.6
7.1
7.4
7.6
7.9
8.1
8.2
8.5
8.8
9.1
9.3
13.0
13.5
14.0
14.6
15.1
2.0
2.1
2.1
2.2
2.3
Rent-ACenter
Rent-AWay
1.0
0.9
0.9
1.9
1.5
7.9
8.0
6.7
11.3
26.8
9.6
10.7
8.4
14.6
33.6
14.9
13.6
13.9
21.7
21.5
1.8
1.5
2.2
4.2
2.1
* The numbers in the tables represent multiples of the relevant characteristic. For instance, at an offer price of $24.50 per
share, the value of Cort would be roughly 1.4 times its revenues.
13