PART SIX Cost of Capital and Long-Term Financial Policy subsequently exercised by the purchasers. As is typical of rights offers, about 2 percent of the rights were neither exercised nor sold, so some stockholders apparently did not act to protect their interests. Only about 586,000 shares were initially unsold, and subscribers sought more than five times that amount in oversubscription rights, so none of the stock ultimately went unsold.

The underwriters, led by Salomon Brothers, earned substantial fees for their services. For managing the offer and promising to buy unsold shares (of which there were none), the basic compensation was 3 percent of the amount of the issue, or $82.8 million. Furthermore, the underwriters were given the right to buy stock at a 3 percent discount on the subscription price, or $77.60 per share. By purchasing rights in the open market, exercising the rights and buying the stock at a discount, and then reselling the stock, the underwriters earned an additional profit of roughly $27.6 million. The total compensation was thus approximately $110 million, or about 4 percent of the issue proceeds. Because this was somewhat high for such a large deal, Time-Warner and its chairman, Stephen Ross (no relation to the noted financial economist and textbook author of the same name), were criticized by various groups.

Motion picture giant Metro-Goldwyn-Mayer (MGM) has been one of the more active users of rights offerings in the United States. MGM completed rights offerings of $200 million in 1988, another $100 million in 1992, and $700 million in October 1998. In November 1999, MGM completed a $721 million rights offering resulting in the issuance of about 50 million new shares. Under the terms of the offer, each shareholder received .328 transferable subscription rights for each common share; each right had an exercise price of $14.50 per share. About 99.3 percent of MGM's shareholders exercised their rights, and the offer was oversubscribed by nearly 3.9 million shares.

Outside the United States, large rights offerings are not uncommon. For example, in September 2000, Spanish Internet portal Terra Networks raised $2 billion in a rights offer to help finance its planned merger with Lycos. In June 2001, British Telecommunications completed the largest rights offering ever when it raised $8.3 billion.

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