During the takeover battles of the 1980s, the term “white squire” designated a significant bloc shareholder that management enlisted to deter or defeat unwanted bids for corporate control. For example, Warren Buffett’s Berkshire Hathaway and Lazard Freres’ Corporate Partners were white squires.
In proxy contests nowadays, management cultivates its quality shareholders (those that are long-term and focused) to fight overzealous shareholder activists. In such contexts, companies reach out to enlist such white squire shareholders as validation capital, whereby the validating shareholder affirms management’s strategy.
In some cases, such investors, when investing new capital, negotiate an attractive price for their investments and favorable terms. For instance, a company might issue convertible preferred stock with high dividends and a pro-investor conversion rate at a discount to intrinsic value.
Today’s white squires include buyers of meme stocks. They are providing validating capital that thwarts threats to incumbent managers posed by another shareholder group, in this case short-sellers.
Except meme-stock buyers are a diffuse mass of autonomous actors, not a bloc. Some are motivated purely by grievance against the shorts, while others also seek massive profits or think of the whole thing as a game.
Also, coordination is ad hoc through social media and related communications. Candidates are troubled companies facing short-seller pressure, such as AMC Entertainment
Meme buyers do not offer a business plan or an investment thesis, as the white squires would, but managers can still point to the interest as a degree of validation.
Third, while some companies may welcome meme buyers to their stock, they do not initiate relationships like those formed with white squires. Rather, meme buyers just show up, as a collective force, by driving the stock price high.
This enables companies to issue new shares at the elevated prices, raising capital not otherwise available. Unlike traditional validation capital, not only are price terms unattractive, these are non-negotiable offers for plain-vanilla common stock without any special rights.
The existing experiments are works-in-progress at best. Consider the pending drama at AMC. The movie theater business prospered into the early 2000s but ticket sales soon peaked amid the proliferation of large screens at home with vast streaming libraries. Declining profit margins and theater closings followed, accelerated during the coronavirus pandemic that shut down theaters nationwide.
In 2020, AMC disclosed net earnings of negative $4.5 billion, almost $6 billion in debt, and shareholders’ equity of negative $2.88 billion. In June 2020, the company warned investors that its ability to continue as a going concern was impaired. Short selling increased.
In a stunning turnabout, meme buyers entered with enthusiasm. During the first half of 2021, the company’s stock price soared, from a low of less than $2 to a high of more than $72. During that bonanza, AMC’s management sold new shares, generating proceeds of $2.2 billion, with its most recent offering on June 3 priced at $51 per share.
AMC’s CEO talked up his meme investors even as the company’s prospectus aptly warned buyers that such a price bore no relation to its fundamentals or prospects. The only sweetener was the free popcorn the company offered its shareholders — though I prefer offering votes or cash, as Esker recently announced, rather than snacks.
AMC’s $2.2 billion capital raise nearly erases its shareholders’ equity deficit and enables repaying debt. The company could buy some of the theaters it presently leases. It may find desperate rivals prepared to sell on the cheap. If done wisely, shareholders may win — at least those who bought closer to $2 than to $51.
In fact, I’m rooting for AMC and its shareholders for two reasons, with two caveats. I’m rooting for the shareholders because I am a champion of individual investors. My caveat is to encourage harnessing their newfound power as traditional white squires have, as consciously capable of providing lifelines to deserving businesses, not merely sticking to the short sellers or playing a game.
I’m rooting for AMC because I am a lifelong fan of movie-going, and for several years worked as an usher at an AMC cinema. The caveat to my nostalgia: As cautious as the company’s prospectus was about its offering price, I’d favor starker language, such as “the company’s officers and directors would not buy the stock at the offering price.”
Selling at inflated prices may be understandable — the AMC offering itself is an arms’-length transaction, and the disclosure certainly legally adequate. But especially when considering the value that meme buyers are conferring, it starts the relationship on a tenuous footing that only such emphatic language mitigates.
Whether AMC can pull this off, and whether the meme buyers will be heroes or not, remains to be seen. The audience is on the edge of their seats.
Lawrence A. Cunningham is a professor at George Washington University, founder of the Quality Shareholders Group, and publisher, since 1997, of The Essays of Warren Buffett: Lessons for Corporate America. For updates on his research about quality shareholders, sign up here.