Demand for Hughes Stock Sparks GM Drop

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A plan to allow General Motors Corp. shareholders to swap their stock for equity in GM Hughes Electronics Corp.-the parent company of DirecTV Inc.-backfired on the automaker last week, as the offering was more than four times oversubscribed.

Shareholders offered 335.8 million GM shares in exchange for the GM Hughes tracking stock last Monday, the car maker said. But GM would accept only 86.4 million shares, or roughly 25 percent.

That news sent GM shares tumbling 11 percent last Monday, losing $9.56 each and closing at $77.38 per share.

According to the deal, GM shareholders could swap their stakes in return for 1.065 shares of GM Hughes stock. The deal represented a 10 percent discount on GM Hughes shares, which closed at $89.94 each on May 19.

But GM shareholders voted with their feet, dumping their GM stock and buying GM Hughes, which saw its price leap 7.1 percent on May 22 to $96.75 each.

GM shareholders continued to trade down the stock on May 25, when it closed at $72.13 per share, down $3.38 each. GM Hughes stock closed at $96.44 per share on May 25, up 56 cents each.

The swap was meant to provide a quick boost to GM's stock by decreasing the number of shares. At least in the interim however, it had the reverse effect, as arbitrageurs and some GM shareholders dumped their shares in the parent company in favor of GM Hughes' stock.

"Since it [the exchange] was so oversubscribed, a lot of arbitrageurs and, frankly, GM shareholders, didn't get what they wanted," said PaineWebber Inc. vice president of research Thomas Eagan. "A lot of arbitrageurs that bought GM and shorted Hughes didn't get enough Hughes, so they have to sell GM and buy Hughes on the open market."

Shares in another direct-broadcast satellite company-EchoStar Communications Corp.-plummeted12 percent to $38.69 on May 24. EchoStar continued its slide on May 25, closing at $36.13 per share, down $2.56 each.

While some of that loss may be due to fears that EchoStar will not be able to reach retransmission consent deals with television broadcasters before its current pacts expire this week [May 29], Eagan said it is more likely because of the stock's normal volatility.

Although Eagan doesn't think EchoStar will reach terms on all of its remaining retransmission deals by May 29, he expects the company to receive extensions to its existing agreements.

"Washington wants to avoid what happened between Time Warner [Inc.] and ABC [Corp.]," Eagan said. "EchoStar [stock], by its nature, is more volatile. It has higher highs and lower lows."

Cable stocks remained relatively unscathed during a NASDAQ market sell-off last week, with most showing losses of between 2 and 3 percent. On May 23, the NASDAQ dropped 199.66 points to close at 3,164.55, its lowest point since Nov. 10. The exchange rebounded on May 24 to 3,270.61, but slid another 65 points on May 25 to close at 3,205.36.

Some cable operators-such as Comcast Corp. and Insight Communications Inc.-even gained slightly. Comcast's stock rose 1 percent to $30 per share on May 23 and Insight gained 1 percent, to close at $14.75 each. Comcast closed at $31.44 per share on May 25 and Insight closed at $14.

Charter Communications Inc. was the big loser among cable operators, dropping 8 percent to $11 per share on May 23. Charter was followed by Mediacom Communications Corp., which fell 7 percent to $8.88 per share on May 23. After another decline on May 24-when Charter closed at $10.75 and Mediacom closed at $7.38-both stocks rebounded slightly on May 25, closing at $11 per share and $7.94 per share, respectively.

Cable technology companies were hurt the most, but that is likely due to the overall bloodbath endured by the technology-heavy NASDAQ.

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