There appeared to be little left to Riscorp beyond a shell. Not so fast. The Riscorp tale, in horror-movie fashion, is still serving up surprises, with a cast of characters -- some familiar, some new -- still fighting over the corporate corpus.
The struggle over what remained of Riscorp heated up in early November, when Griffin got out of jail and returned to Sarasota to begin rebuilding his business empire. He returned with a bang, offering to buy the one-third of the outstanding Riscorp shares he didn't already own for $40.6 million, or $2.85 a share.
His gambit to buy back the shares of Riscorp stock held by investors offers Griffin several advantages. For one, he avoids millions of dollars in capital gains taxes he would have to pay if the company is liquidated and the proceeds divvied up among shareholders.
By taking complete control of the company, Griffin also ensures that Riscorp -- the corporation -- won't sue him for his misdeeds and their role in the sharp drop in the company's value.
Griffin certainly has the financial wherewithal to back up his proposal. When he took the insurance company public in 1996, he sold 14.3-million shares -- or one-third of the outstanding common stock -- to investors for $19 a share, or $271 million. He retained ownership of 24.3-million shares. Two years later, however, after the company's business faltered and Griffin and four of his top executives pleaded guilty to violating campaign laws, the stock plummeted to below $1 a share.
Riscorp's directors hired Frederick Dawson, a seasoned trouble-shooter, to salvage what he could. Dawson settled most of the lawsuits and sold the company's insurance business to Zenith Insurance Co. (Dawson died in October after a long struggle with cancer. Management of Riscorp passed to his associate, Walter Riehemann.)
Opposition
In November, after weighing their options, Riscorp's three outside directors, including Miami businessman Walter Revell and former Florida Progress executive George Greene, voted to accept Griffin's offer of $2.85 a share, a 20% premium over the company's stated book value of $2.35 a share. But at least two big investors oppose the deal. They contend Griffin is getting a sweetheart deal, and that he should be paying a bigger price for their shares. "I'm not going to be voting for this deal," says Seth Hamot, a partner at Boston-based Roark, Rearden & Hamot, who controls 1-million shares of Riscorp stock.
Using his own calculations to value Riscorp, Hamot, in a public letter, says $3.65 a share is a fair price. His argument: Griffin's proposal doesn't include three contingent assets, including two legal actions against the Florida Department of Labor, and a suit against Zenith over the price paid for Riscorp's insurance operations. The Griffin offer also doesn't include the value of any tax-loss carry-forwards. Because of a write-down of assets, Riscorp won't have to pay taxes on $47 million in future income, Hamot says.
Hamot isn't alone. Robert L. Chapman Jr., managing member of Los Angeles-based Chap-Cap Partners, which owns about 1-million Riscorp shares, also is pressing for a higher price. "It took a rank amateur like Hamot to show Riscorp what the value of the company really is," Chapman says. Chap-Cap also is suing Riscorp, alleging that Riscorp filed false reports about the company's financial condition in 1997 and 1998.
Nonetheless, Riscorp is pushing ahead with the deal. After several delays, a proxy statement outlining the proposed sale was to be filed with the Securities and Exchange Commission in January. Once approved by regulators, shareholders vote on it. To pass, the deal must be approved by at least two-thirds of the 14.3-million shares owned by outside investors.
Riscorp's Riehemann acknowledges it's going to be an uphill battle. "There's isn't much room for error," he says. "We need to beat the bushes."
What happens if the deal isn't approved? Most likely, Riscorp's directors, having fulfilled their duty, will resign. That would pave the way for Griffin to assume control of the board. But before that happens, Hamot and others are betting that Griffin will sweeten his offer.
Otherwise, if Griffin takes over the board, he'll open himself and the company up to a derivative shareholder suit, predicts Hamot. "If Mr. Griffin wants to step in and manage the company and the board, the laws of Florida will not be favorable for him," Hamot says. "I want him in there. I want to take a shot."
The Inside Track: Not Always an Advantage
Company executives should have an inkling about their companies' prospects, right? After all, that's why investors track the buying and selling patterns of company insiders. Unfortunately, the guys with the inside skinny don't always make the right call. Case in point: CSX Corp.
Last May, Pete Carpenter, then-president and chief executive officer of CSX's principal holding, Jacksonville-based CSX Transportation, and former chairman of the Florida Council of 100, shelled out about $7.7 million to buy 150,000 shares of CSX stock at an average price of $51.23. Carpenter had company. CSX Chairman John Snow bought 257,000 shares of CSX stock for $13.3 million.
At the time, CSX was putting the finishing touches on its acquisition of Philadelphia-based Conrail. CSX had spent more than a year, millions of dollars and countless man-hours preparing for the merger, which CSX executives predicted would boost profits. In the meantime, however, traffic snarls and higher-than-anticipated merger costs hurt the bottom line. In late December, CSX warned that fourth-quarter earnings would be well below analysts' estimates. CSX shares hit a 52-week low just shy of $29. The value of the 150,000 shares Carpenter purchased in May declined by $3.3 million, while Snow's shares fell by $5.8 million.
The lesson: "It tells us you have to do a lot of homework on inside trades," says Bob Gabele, president of First Call Insider Research Services. "Never do something just because of insider buying. That's just one tool in the box."
Carpenter declines to discuss the particulars of his May 1999 stock purchases. However, he's been a long time buyer of CSX stock. In fact, he says, he hasn't sold any CSX shares since 1987 and he remains bullish on the railroad's long-term prospects. Moreover, he believes "senior management ought to be aligned with shareholders."