Polo Ralph Lauren: When Founders Cash Out (RL)

Founders of companies can become worth hundreds of millions of dollars, or even billions, when they keep large shareholdings in their companies.  The catch is that the companies have to succeed.  Polo Ralph Lauren Corporation (NYSE: RL) meets this criteria.  So what happens the day that a founder cashes out in share sales worth more than $800 million?

Polo Ralph Lauren Corporation (NYSE: RL) has sold a public secondary offering of a 9 million shares of common stock at $81.00 per share.  The use of funds is not for acquisitions and is not even “for general corporate purposes.”  The shares sold by founder Ralph Lauren.  The Company will not receive any proceeds from the offering.   All of the Class A common stock sold by Mr. Lauren consisted of shares received upon the conversion of an equal number of shares of his Class B common stock.

As with many share sales, “Wait, there’s more.”  The company itself also purchased 1 million additional shares from Mr. Lauren at the $81.00 offering price.  That brings the shares sold by Ralph to a gross of $810 million before fees.

The shares sold to the public at $81.00 were sold by J.P. Morgan, Goldman Sachs, Deutsche Bank, and UBS.  The underwriters have a 30-day option to purchase up to an additional 1.35 million shares from Mr. Lauren.

Can you accuse Ralph Lauren the person of now not having so much skin in the game in the success of Ralph Lauren the company?  Sure, sort of.  After this offering, Ralph will still own 2,410,759 Class A shares and some 29,487,594 Class B shares.  He is 70 years old.  But the biggest issue to consider here is the tax ramifications.  After 2010, the capital gains tax is expected to rise.  It could rise substantially.  What is for sure is that insiders selling their company shares with a cost basis of close to zero will possibly never again have that 15% capital gains tax rate.

Ralph Lauren shares are hardly being punished for the sale.  Shares closed at $82.44 yesterday, and the stock is down 2.1% at $80.68 today.  Two days ago the stock closed at $84.17, although the stock was under $79.00 as recently as June 8.

If you could sell this year and pay out the least in taxes for the foreseeable future, wouldn’t you?

JON C. OGG