The prevalence of tying is largely a product of the consolidation of banks in the late 1990s, and of the repeal of the Glass-Steagall Act in 1999, which kept commercial banks out of the investment-banking business, says Dimitri Papadimitrious, president of the Levy Economics Institute at Bard College in New York. He doesn't think Glass-Steagall should be reinstated, but he does think regulators need to enforce existing laws, including those that prohibit tying. Says Papadimitrious: "I'm not so sanguine that regulators will do the due diligence on lenders until it reaches a crisis; then it's already too late."

Too Small to Keep
In this market you wouldn't expect companies to turn investors away, but that's exactly what some are doing. Why? To save money, of course, says Scott T. Gallagher, senior vice president at Georgeson Shareholder, a New York shareholder-communications firm. "Public companies are looking under every rock to eliminate hidden costs."

Odd-lot shareholder programs--in which companies offer shareholders with fewer than 100 shares a chance to either sell them at discounted fees or buy enough to hit 100--are making a comeback. Georgeson has conducted more than 700 of them.

Companies might be surprised by just how many shareholders fit the bill. On average, 55 percent of a company's investors hold fewer than 100 shares, but they represent less than 1 percent of shares voted, says Gallagher. It costs a public corporation more than $19 annually in servicing costs for every shareholder, regardless of how many shares he or she holds, according to a recent study by PricewaterhouseCoopers.

John Hancock Financial Services Inc. recently launched a voluntary odd-lot program. So far, the insurer says, it's "hitting its target" for eliminating odd-lot shareholders, but the company recently extended the deadline to participate by a month.

The average redemption rate is 30 percent to 40 percent, according to Gallagher, but investors don't always jump at the offer. International Absorbents Inc., a small-cap pet-care products company in Bellingham, Wash., recently launched an odd-lot program involving a share buyback. The company identified 90,000 shares held by odd-lotters, but at the deadline, only 3,198 shares had been redeemed. "Compared to what they bought the stock for, it wasn't worth it for a lot of them to do a trade," says Charles Tait, director of corporate communications. The odd-lot offer was $2.35 per share.

But the program, which ended on September 9, had a positive, if unexpected, outcome. "A lot of people decided to hold on to their shares," says Tait. "And some even bought more after I spoke with them."

Pension Plans: The Party's Over
Pension plan sponsors are living in the past. Some critics say that many companies have not updated their investment-return and interest-rate assumptions to reflect the current conditions of low interest rates and dismal stock-market performance. And while plenty of plans are now underfunded, the true picture could show underfundings at crisis levels.

"Plan sponsors have become increasingly aggressive. They're pushing the envelope on this stuff," says Stephen Church, president of Piscataqua Research Inc., a Portsmouth, N.H., consultancy. "Interest-rate assumptions are too high, as are investment-return assumptions."

Church says that plan sponsors are overstating interest rates--used to calculate a discounted present value of future liabilities--anywhere from 1 to 2 percent. The miscalculation has the effect of drastically underestimating what companies will owe future retirees in benefits.

Jeffrey Speicher, a spokesperson for Pension Benefit Guaranty Corp., which insures pension plans, says that pension assets have deteriorated. "Conditions are certainly very drastic right now," he says.

Indeed they are. A recent survey by benefits consultant Watson Wyatt Worldwide found that of 500 pension plans studied, the percent with enough assets to cover total pension liabilities had dropped from 83 percent in 2000 to about 33 percent this year.

That means that companies are on the hook to make up the difference. Even though General Motors, for example, announced this summer that it contributed $2.2 billion to its pension fund, the plan is still underfunded by $20 billion, according to an estimate by UBS Warburg. Church, however, says that using more-conservative assumptions, the actual amount could be even higher.

GM's plan assumes that investments will return roughly 10 percent annually. In 2001, however, the return on plan assets was a loss of more than 5.6 percent, and losses are expected to be higher this year. "Bad information leads to bad decisions," says Church. "Companies need to do more to make sure things are presented in fair fashion."

The Big Three's Big Ifs

Automakers' 2001 pension assumptions could hide shortfalls.

Source: Futuremetrics Inc.

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