Change due for HP, Agilent stockholders

Q: I have 500 shares of Hewlett-Packard. What’s the deal with Agilent stock? When will I get it, and how many shares will I get?

A: On a date to be announced in May/June, you will receive a distribution of Agilent stock in approximately a 1-to-0.38 ratio.

As the question is a common one, let’s use your case as a hypothetical example. The day before the distribution you would have 500 shares of HP at a hypothetical closing price of $150/share, giving you a total value of $75,000. The next day, you would still have 500 shares of HP, but you would also have 190 shares of Agilent (500 shares multiplied by the estimated distribution ratio of 0.38).

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To even out the overall dollars, the price of HP stock would adjust down such that the value of 500 shares pre-distribution will be equal to the sum of 500 shares of HP at the lower price plus 190 shares of Agilent at its closing market price.

Let’s assume Agilent closes at $120/share the day before the distribution. Since your 190 shares of Agilent would be worth $22,800, and your HP was worth $75,000, the new price of HP the next morning would be $104.4/share, leaving with your original value.

Obviously, the closing price of HP on the day before the distribution, the number of HP shares you own and the actual distribution ratio will cause the figures in this example to change.

For current Agilent shareholders, the distribution will not affect you — directly. Indirectly, you should be cognizant of the potential selling pressure the new Agilent shareholders could have on the price of Agilent.

Since HP currently owns 85 percent of the Agilent shares, 85 percent of the Agilent stock will be distributed that day. That means the current price has been determined with only 15 percent of the shareholders having the opportunity to sell.

Further, buyers of Agilent have known this was coming for some time so maybe they haven’t bought as much as they would like, and there is hidden demand for the stock.

It will be interesting to see what Agilent’s stock price does following the distribution.

Q: I’m about to sell my business. I’ve done some investing in the stock market, but most of it has been investing back into my business. I would like to retire with the money I get from my business sale. I think I can do it, but the stock market worries me. These stock market returns look great, but I don’t want to take my income for granted. Do you have any ideas?

A: I certainly do — Give me a call.

Building wealth almost exclusively through your business is common among successful business owners. The problem when the business is sold is that investment vehicle you have so much confidence in is gone.

The stock market can be quite volatile, and you will not have any control over it, and many former business owners have a difficult time investing their wealth in the performance of businesses and people they don’t know very well. The feeling of helplessness drives them nuts.

I recommend you consider a balanced portfolio, one comprised of both stocks and bonds. This strategy allocates a percent of your portfolio to bonds that can generate a stable source of income. Then, you can invest the remainder in the stock market with the intention of generating overall portfolio growth. This growth is essential so you can increase your income throughout your retirement to keep pace with inflation.

Q: I’ve heard a lot about incredible amounts of money being made on IPOs. How do I get a piece of it?

A: For those who don’t know already, the term IPO stands for Initial Public Offering. An IPO usually refers to the day a privately held company – or newly created, as in the case of Agilent – trades for the first time on a stock exchange like the New York Stock Exchange or the NASDAQ.

You’re correct in referring to some recent IPOs as 3incredible.2 The biggest pitfall associated with IPOs is failing to recognize that there is typically a substantial difference between the offered price and the price at which the investor actually purchases the stock once it is efficiently trading on the market.

It is common to hear on the TV or radio one evening between the Ramsey-case update and a snow-related survival story that another IPO finished the day up 100-plus percent. This can be misleading to many investors, because this large percentage increase is based on the difference between the offered price and the closing price, not the opening price and the closing price.

The offered price is an estimation determined by the underwriters of the IPO that projects where the stock could trade. It’s a best guess.

As strong as this market has been – particularly in Internet-related IPOs – the demand is often so high the stock begins trading significantly higher than its offered price. Be aware that IPOs can open and close below the offered price, and keep in mind that past performance is no guarantee of future results.

Given the uncertainty of the opening price and near certainty of volatility, I don’t recommend investing in IPOs as a way to build wealth. The best way to get a piece of an IPO is to create it yourself. When you start a business and take it public, you’re the one cutting the pie.

Kelly Giard is a financial consultant with A.G. Edwards & Sons Inc., Member S.I.P.C. He works primarily with local, high-net-worth business owners and can be reached at (970) 223-4800.

The information contained herein has been obtained from internal and external sources believed to be reliable, but it’s not necessarily complete, and its accuracy is not guaranteed by A.G. Edwards & Sons Inc. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Additional information is available on request. A.G. Edwards currently rates Hewlett-Packard Accumulate/Aggressive; A.G. Edwards does not closely follow Agilent.