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Feb.3,2012Get Started With as Little as $50
As mentioned formerly, depositors at mutual banks ‘own ‘ the bank and receive concern rights to purchase stock in the IPO if the bank switches to public possession. At most mutual banks it will only take $50 to open a high-interest account. A $50 high-interest account gives you concern rights to get stock at the IPO price if the bank switches to public possession.
The simplest way to get priority rights to get mutual bank stock at the IPO price in a conversion is to open up a savings account at a mutual bank in your area. I have got a home in New Jersey and have opened up tons of savings accounts in New Jersey, Big Apple, Pennsylvania, Connecticut, Massachusetts, New Hampshire, Vermont, Virginia, Maryland and Delaware. I love to open accounts when I travel or go on vacation. My youngsters are so used to me running into banks and opening accounts when we go skiing or go on vacation that they think opening bank accounts is a standard part of everyone's holiday!
There is never any advance notice on when a mutual bank might convert. I try and open accounts at as many banks as feasible so as to have priority rights to get stock at the IPO price in the event a bank decides to convert to stock possession. I've had bank tellers tell me when I was creating an account that their bank has no design to convert to stock ownership only to receive a conversion package in the mail from that same bank a month later.
When you apply for an account at a mutual bank, bank regulations demand that you be alerted by mail if the bank comes to a decision to convert to stock possession and you must also receive a prospectus and stock order form. Stock is acquired right from the bank in a conversion and shoppers receive a stock certificate in the post. There's no brokerage commission concerned with the purchase of the stock.
For those of you who don't have any mutual banks in your area, it's actually possible to open accounts by mail at some banks. I have opened 142 savings accounts in 26 different states thru the mail.
It is true that opening numerous bank accounts can use up a portion of your available capital but I think about this my ‘safe ‘ money that is instantly available in case I need it. In the meantime I am making interest on my high-interest accounts.
An Interesting Phenomenon
Since 1853 Cambridgeport Bank accumulated $78,578,000 in revenues which is also known as net worth or equity. Because Cambridgeport Bank was a mutual bank this $78,578,000 in takings wasn't distributed and revenues just amassed year after year.
In the IPO the bank sold 7,443,000 shares of stock at $10 per share and as a result the bank received $74,430,000 in readies from the stock sale (7,443,000 shares x $10.00 per share = $74,430,000). The money proceeds of the stock conversion added $74,430,000 to the net worth of the bank. As discussed previously, since 1853 the amassed net worth of the bank has grown to $78,578,000 so that the $74,430,000 received in the stock sale about doubled the original net worth of the bank on the day the stock IPO was finished.
The stock conversion virtually doubled the net worth of the bank as the total net worth increased to $153,008,000 ($74,430,000 $78,578,000 = $153,008,000). This 153 million dollars of net worth or equity now belongs to the stockholders who own the stock. If you divide the net worth of the bank by the total number of shares exceptional, in this example 7.443 million, you get a number called ‘Book Price ‘ per share. Book value's the cash value per share if the bank was liquidated. If you divide the $153,008,000 of net worth by the 7,443,000 number of shares the result is a book worth per share of $20.55 ($153,008,000/7,443,000 = 20.55). So basically you are purchasing stock at $10.00 share that has got a book cost of $20.55 on the IPO date.
Peter Lynch described this bank conversion phenomenon in a chat with Worth . Magazine: “So when the thrifts began to publicly confess, there were no prior owners to pay off, as happens in most public offerings. Rather than a big hunk of the returns ending up in the pockets of the company’s founders, all the cash was returned to the company till.”
“For the lucky buyers of the shares, the result was the same as buying a new auto for cash, then discovering the dealer has left the cash in the glove compartment as a car-warming present. Let’s say the local S&L (mutual bank) had a book cost of $20 million, the results of decades of earnings built up within the company. Then it went public and sold $20 million worth of shares in the offering. That $20 million invested by the stockholders became their thrift-warming present to themselves; in reality they were purchasing the business for nothing. And because their $20 million was injected into the S&L, the book worth doubled overnight, from $20 million to $40 million. In theory, each share was now worth 2x as much as the stockholders had paid for it.“
Buying mutual bank stock in a conversion IPO at of its book worth must be one of the lowest risk stock investments available today. In addition to low risk, buying stock at of its cash break price also gives you tremendous profit potential. We intend to next look at some examples of mutual bank stock conversion IPOs in which I acquired stock.
Tags : chuck, hughes, investing, investment
