Case 38: Adaptec

Brian Reeves opened his mailbox to find a letter from Adaptec, Inc., a global leader in data storage access solutions, which had cost him a lot of heartache in the recent 6 months. After being enticed to purchase shares in high-tech companies after they enjoyed a significant run-up in value, Brian jumped on the band wagon only to see the value of the stock get cut in half.

The letter read, "Adaptec, Inc.,… announced that the Form 10 Registration Statement for the spin-off of Roxio, Inc., a wholly owned subsidiary of Adaptec, has been declared effective by the Securities and Exchange Commission. Included in the Form 10 is an Information Statement, which will be mailed to Adaptec stockholders later this week…" Skipping over a few sentences, Brian continued.

"On April 12, 2001, the Adaptec board declared a dividend to Adaptec stockholders of record on April 30, 2001, of shares of Roxio common stock. The dividend will be paid after the close of business on May 11, 2001, in the amount of 0.1646 shares of Roxio common stock for each share of Adaptec common stock. Adaptec stockholders will not be required to pay any cash or other consideration for the shares of Roxio common stock distribution to them or to surrender or exchange their shares of Adaptec common stock to receive the dividend of Roxio common stock."

After reading through all the documents, Brian learned that there are two ways to trade the Adaptec shares between the date of record, April 30, and the distribution date of May 11. He could either trade the "regular way," which meant when he sold a share of Adaptec, he would also be selling the right to the shares of Roxio (Ticker symbol = ADPT), or he could sell "when issued," which meant that he is only parting with shares of Adaptec (Ticker symbol = ADPTV). That is, he would retain the rights of owning shares in Roxio when they became available for sale.

Questions

1. Brian wondered why he did not have to do anything in order to be awarded shares of this new company, Roxio. Explain why it makes sense that he did not have to do anything.

2. Assume Brian owned 100 shares of Adaptec. Based on the ratio of exchange of 1 share of Adaptec = 0.1646 shares of Roxio, how many shares of Roxio will Brian receive assuming he retains his Adaptec shares?

3. To follow up from question 2, what will happen to the rights to FRACTIONAL shares? That is, after calculating the number of shares Brian is to receive, what happens to the extra fraction of a share given that with common stock, fractional shares ownership is disallowed?

4. Continuing with the fractional share discussion, what are the tax ramifications of these fractional shares?