Kohler Case - Who Are the Winners and Losers from Kohler’s 1978 Stock Split?

1) Who are the winners and losers from Kohler’s 1978 stock split?

Kohler Company and the family shareholders are the biggest winners of the 1978 reverse stock split. For one thing, the company bought back a certain amount of their stocks that publicly traded on the market, reducing the total number of shareholders, which exempted the company from the burdensome regulatory requirements by the Securities and Exchange Commission that could undermine the firm’s commitment to its mission and long term development. It also permitted the company to free from the detailed financial disclosures to its competitors, which would let out the company’s strategic plans, inducing the competing environment getting worse. Furthermore, it reduced the risk of corporate takeover in the future, which could be a long term concern for the company. For another, the family shareholders, especially Herbert V. Kohler, Jr., the Chairman and CEO, got better control of the company and reinforced the company’s private ownership, which they treasured the most of the company.

Outside shareholders who had more than 20 shares before the reverse stock split and did not sell their stock also benefit in this reverse stock split. Since many of the outside shareholders sold their shares to Kohler Company, there were fewer public shares available in the market. The relatively low supply of available stocks on the market would trigger an increase in the stock price in the market. This was proved in the following years that the Kohler Company’s shares in the market were trading with increasingly high prices. Therefore, these shareholders who kept the stocks benefit from the reverse stock split.

The smaller shareholders who were “forced” to sell their shares to Kohler Company were the losers of the 1978 reverse stock split. The 1-for-20 reverse stock split increased the stock price sharply by 20 times which was too high to many small shareholders. These shareholders had less than 20 shares of the company, and were not able or willing to pay for the high stock price were forced out by the company even though they had a optimistic expect on the company’s future profitability. Therefore in this reverse stock split, they lost their shares and thereby the right to benefit from the company’s profitability. And they also lost the chance to benefit from the increase in the stock prices in the market later on.

2) Why does Herbert Kohler want to do the recap? Why does he want to buy the minority shareholders when he already controls about 90% of the company?

In 1998, Herbert Kohler wants to buy back all shares of outside shareholders because of two main reasons. First, Kohler appreciated the private status of the company. He did not like the increasing prices of shares and, as a result, the ongoing publicity and speculation