Max Bialystock...........
Investors Earn Their Strypes With an Exotic
Security
By Jerry Knight
Washington Post Staff Writer
Column: WASHINGTON INVESTING
Monday, March 10, 1997 ; Page F29
One of Washington's most obscure mega-millionaires, wireless communications
magnate Rajendra Singh, earned his Strypes on Wall Street last week by selling
$100 million worth of one of the most obscure securities Washington has ever
seen.
Strypes are an investment hybrid -- not common stocks, not preferred stocks, not
bonds. It's an acronym invented by Merrill Lynch & Co. for an unusual investment
vehicle, the full name of which does not help describe it much: Structured Yield
Product Exchangeable Into Stock.
Like caterpillars that turn into butterflies, Strypes are securities that start off giving
investors the kind of guaranteed, regular income they get from bonds and then
metamorphose into ordinary stocks, the value of which are as unpredictable as a
butterfly's flight. Strypes belong to the family known as "convertible securities,"
including convertible preferred stock, which can be turned into common shares.
The securities are unusual -- less than a dozen have ever been issued -- and so is
Singh. The 41-year-old PhD engineer is founder and chairman of LCC
International Inc. of Arlington, which designs wireless communications systems.
Singh also is co-owner of Associated Communications LLC, a privately owned
Alexandria company, best known for hiring AT&T President Alex Mandl away from
the giant phone company by offering him a $20 million signing bonus.
Little-known outside his industry, Singh and his family got about $40 million last
year for selling part of their stock in LCC to the public. They still own nearly
two-thirds of the company, worth more than $80 million, based on the $10.12 1/2
price of LCCI shares at the close of Friday's trading on the Nasdaq Stock Market.
Singh also is a big shareholder in Nex\tel Communications Inc. of McLean, which
has stakes in cellular phone and other kinds of wireless communications networks
in the United States and other countries.
By selling his Strypes last week, Singh was able to get cash without actually
selling the stock for about 7.2 million shares of Nextel he owns. Because the stock
isn't being sold, Singh delays paying any taxes on the profit.
The Strypes also offer a tax advantage to investors because the investment
vehicle pays a 7.25 percent annual dividend that is mostly tax free. Strypes also
give investors a chance to make money on Nextel stock if it rises more than 19
percent over the next three years. But if Nextel stock drops during that period,
investors in the Strypes will bear the loss, not Singh.
The complicated transaction "was really done to monetize the stock . . . and still
maintain the stake in Nextel," said Rahul Prakash, vice president of Telcom
Ventures, another Singh company. The $80 million raised by the venture will be
reinvested in various other ventures, he said.
Prakash said the complex offering will benefit Nextel shareholders. "You really
don't want to contribute an additional supply of the stock," because that would
dilute the value of the outstanding shares, he explained. The Strypes were bought
by a different group of investors than those who buy stocks, diversifying the capital
base of the company.
Figuring out whether the unusual securities are a good investment risk is difficult
because the structure is so complicated and there are so many variables.
When you cut through the underbrush, "basically it's a bet on where Nextel stock
will be three years from now," said a mutual fund manager at T. Rowe Price who
follows the company's stock. The manager suggested that investors simply buy
Nextel stock if they think the company is a good investment.
Most of the Strypes are bought by aggressive mutual funds that hope to earn a
higher return than they can get from the stock alone. Traded on the American
Stock Exchange under the symbol MNX, the Strypes also are a potentially
interesting play to sophisticated investors.
The Nextel Strypes illustrate how Wall Street's financial rocket scientists can
dream up securities that are as exotic as a cloned sheep. As such genetically
engineered securities proliferate, investors will find more of them turning up in the
mutual funds they buy.
Merrill Lynch executives said the firm has painted a handful of Strypes, each
designed for a particular client but with a common goal: to give the client access
to the capital markets in a way that would otherwise not be available.
For Singh, the goal was to get cash for 7.2 million shares of Nextel stock he was
paid in January when Nextel bought his stake in Wireless Ventures of Brazil Inc.,
that nation's biggest wireless communications network. Under terms of the sale,
Singh's Nextel stock was not registered for public sale and he could have faced
large capital gains taxes if he sold.
How much profit Singh made on the Brazilian deal isn't known. He is very
protective of his personal finances but the Strypes offering documents provide
clues to his wealth. Some of the securities were sold by two educational trusts set
up for Singh's children. Each of those college funds owned $8 million worth of
Nextel stock.
Together Singh, his wife, Neera, and various family entities sold about $101
million worth of Strypes . The securities were priced at $14 a share, the same
price as Tuesday's closing price for Nex\tel stock. (In the future, the Strypes will not
track Nextel shares precisely.)
Of the $101 million generated by the offering, only about $80 million went to Singh.
In return for the $80 million, Singh signed a contract to sell his Nextel shares to the
Strypes buyers three years from now. Meanwhile, he retains control of the stock.
The other $21 million from the offering was invested in U.S. government bonds
and notes, which will provide cash to pay the 7.25 percent a year dividend on the
securities. The dividend is technically part of the investors' money that is given
back to them, a "return of capital" in tax jargon, so it is not subject to federal or
state income tax.
The Strypes pay interest for three years. What happens then depends on the price
of Nextel shares at that time.
If Nextel stock is selling for $14 a share or less, the Strypes investors will get one
share of stock for each of their Strypes. The investors are taking all the risk of the
stock falling. In return for shouldering that risk, they earn 7.25 percent a year tax
free, while ordinary Nextel shares pay no dividend.
If Nextel stock is selling for $14 to $16.66 a share, the investors will get their
money back, either $14 in cash or Nextel stock worth that amount. In return for their
dividend, the investors give up the first $2.66 in gains on the stock.
If Nextel stock is selling for more than $16.66 a share, the investors will split the
gain -- above $16.66 -- with Singh. The investors get 85 percent and Singh gets
15 percent.
There is one final wild card. When the Strypes mature in three years, Singh can
give investors the stock, keep the shares and settle up in cash or pick some
combination. If he delivers the stock, any profit on the transaction is tax free to
investors until they sell the shares, but Singh will face capital gains taxes on the
stock sale. He could avoid taxes by paying investors in cash, but in that case, they
would owe taxes immediately on any profits.
Walking through the transaction, it's clear that besides the questions of taxes and
stock prices, there are other variables involved in evaluating the deal: the 7.25
percent dividend, the $2.66 in gains given up by investors and the 85-to-15 ratio in
splitting the upside stock profits.
All those terms were set by the underwriters who created the Strypes. It was a
delicate balancing act between finding an attractive way for Singh to raise cash
and creating an investment that investors would find appealing. Because the offer
was a success, presumably everybody is happy.
Check back three years from now. Meanwhile, watch the portfolios of your mutual
funds. If scientists can clone sheep, they can give investors new Strypes.
The Washington Business selected area stock index closed Friday at 196.1, up
5.7 from the previous week.
Articles appear as they were originally printed in The Washington Post and may
not include subsequent corrections.
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