Hopper Soliday
Into the Hopper: Trials of a Fund Turned Operating Company

May 15, 1989

IN 1986, investors shelled out $37 million for Decision Capital Fund. Those who anted up the $20 per share thought they were buying a closed-end fund. What they were to get instead is a lesson in the dangers that lurk when an investment fund decides to become an operating company.

The Decision Capital prospectus said the fund's primary objective was "long-term capital appreciation" through a diversified portfolio of investments in "equity-related securities of regional and community banks and thrift institutions." (It seems long ago and far away, but back then, Wall Street was having a serious love affair with-of all things-the savings and loan industry.)

It didn't take long for Decision's plans to change dramatically. James Lowry, the fund's manager, soon became disenchanted with bank and thrift securities, and in mid-1987 recommended that Decision Capital drop its investment fund status, become an operating company and get into the booming financial services industry. Displaying bullish enthusiasm, he bought Hopper Soliday & Co., an old investment banking and securities brokerage concern. The price: approximately $15 million-three times book value. Shareholders went along with the board of directors' recommendation and approved the transaction.

Decision Capital took on its acquisition's name and had just acquired a stake in Fahnestock & Co. when the October 1987 Crash clobbered the brokerage business. That year's results showed a loss of $1.4 million, or 69 cents per share.

Declaring that "opportunities exist in times like these," Lowry forged ahead and acquired Cunningham Schmertz & Co., Robert C. Carr & Co. and W.H. Newbold. Result: In its '88 year, the company lost $5.17 per share, $3.34 of which was attributable to a writeoff of intangibles relating to the acquisition of the old Hopper Soliday organization.

Today, Hopper's book value is about $10.50 and the stock changes hands around a meager $7 a share. This isn't surprising, since the brokerage business is in the dumps and Hopper's 17 branch offices are limping along like everyone else's. For the first quarter, Hopper earned eight cents per share.

Ironically, the original prospectus had warned that Decision Capital could be hurt because Lowry might not be able to continue providing his services to it. Some shareholders now probably feel that a warning to the opposite would have been more appropriate. But there is a bright side: Hopper has about $40 million in annual revenues, has $900 million under management, mainly from individuals, and is an important factor in public finance in Pennsylvania.

Although shareholders have lost almost two-thirds of their money, Chairman, President and CEO Lowry hasn't done badly. And he says that the change in the company's structure "was made in complete good faith."

Since converting to an operating company, Hopper has almost doubled, to $335,000, the annual compensation it pays him. In his own defense, Lowry notes that the company's executives, himself included, have taken 5%-10% across-the-board pay cuts. And he says that a large part of his salary is justified by the "fee income" he generates for the company. Lowry has also been granted 100,000 shares of stock (about 5% of the company) worth over $1 million based on book value. One can only wonder what his compensation package would have been had he made money for the shareholders.

Even though Hopper's balance sheet isn't what it used to be, it's still strong, with the bulk of its assets in cash, receivables and securities. As a matter of fact, at $7 a share, Hopper is actually trading right around its net current assets, minus all liabilities. It's a "net-net," in other words, a rarity for a Big Board company. (I, by the way, own some Hopper stock, and that was its main attraction for me.) At that price, a purchaser of the stock is buying the net-net current assets and getting a regional brokerage firm (albeit a struggling one) thrown in for free.

Is the stock a good buy at this price? James Lowry seems to think so. He recently bought 68,300 shares at prices of 6 5/8-7. Combined with the 100,000 granted him, he now owns about 12% of the company, up from 0.5% when the change to operating company took place. Lowry himself says that there are hidden values in the company. (If he's right, his holdings should pay off especially well somewhere down the line.)

These days, companies selling this cheaply don't seem to stay independent for long. But a hostile takeover would take some doing. Hopper Soliday has staggered the dates on which directors' terms expire, adopted an 80% super-majority voting provision to remove directors, and approved other anti-takeover provisions, including one that would allow issuance of a "blank-check" preferred stock-one whose terms can be set by the board later.

What does the firm's largest shareholder think of all this? The Gabelli Group, with 22% of the stock, is nursing a loss since a good part of its stake was accumulated when Hopper was still Decision Capital. Mario Gabelli, the group's chief, isn't too pleased about the anti-takeover provisions, but offers this analysis: "Yes, it's cheap-a $15 million market cap for a New York Stock Exchange company. But I'm not viewing it as a takeover. I see it as a way to hitchhike on a venture capital play in financial services. You could make three to four times your money if this works out, and Lowry certainly has a big incentive to make it work now. This business is his life vest, and if he wants to emerge as a good guy, he has to perform."

As for Lowry, he talks about acquisitions, not sales. "We're not looking but we're listening. We're working to shift the mix of business from commission income to public finance."

Maybe, but many other shareholders might welcome a change in command, friendly or otherwise. All that's certain is that investors who have been in for the long haul have learned some costly lessons, not the least being that, on Wall Street as on Main Street, you don't always get what you think you're buying.

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