Minority Business: A Hidden Boon for Wall Street?


September 26, 1991|By GARY MIZEL

DENVER. — Denver -- The securities industry is constantly adapting to changing market conditions. From the arbitragers who hedge on stock, bond and commodity ''spreads'' to the creators of ''equity derivatives'' such as foreign stock-exchange index options, the securities exchanges are often at the forefront in the invention of new ways to invest in advantageous market situations.

As I see it, the marketing of small minority-owned businesses to the securities industry could create the next generation of fortunes on Wall Street.

The socio-political effect of the inequities that exist for minority businesses in the securities industry has created a marketing opportunity that could open doors in the Congress, the media, and the Securities and Exchange Commission. And I believe this help will come on demand, because the securities industry is less representative of minorities than any other area of our society where commerce is initiated.

Many large corporations that contract with the government have created small-business development offices, which are partially staffed by minorities. This movement has come about as a result of affirmative action and represents an attempt to bring minority suppliers into the process of bidding and securing contracts. But so far the function of such small-business development offices is to create an image that will secure the companies more government contracts.

They have not yet discovered that use of minority contractors offers an opportunity for great profit.

Here is how. Companies such as Rockwell International and Martin-Marietta farm out contracts for the production of individual components. The small minority companies that supply these parts are called ''detail companies.'' Martin, for instance, signs a deal with a detail company to supply a part for a period of time equal to its government contract. If the government contract is for three years, then the detail company acquires a three-year contract from Martin that represents a three-year revenue stream.

But this relationship would also provide Martin with the opportunity to invest in this minority business -- if the business were structured as a corporation that could issue common stock. Martin would invest the required capital and the minority-owned and controlled detail company would have a guaranteed three-year earnings stream during which it would work to raise private-placement funds and eventually go public.

The amount of money that Martin would invest in the detail company would be the same in either case, but if Martin had an interest in the company it would be paying less for its supplies by allocating 75 percent of its investment to the contract and 25 percent to the stock purchase.

On top of that, Martin would still own a portion of its supplier long after the contract with it had expired. This could prove to be quite profitable for Martin if the minority-owned detail company were able to grow. For simplicity, this process is called ''contract securities.''

Normally, minority suppliers find it difficult to replace their earnings when contracts have expired. But if our minority-owned detail company were owned in part by Martin and perhaps other principal shareholders in the private sector, then the company would be more likely to secure future contracts with other corporations because of its association with well-known industry players.

Also, the close relationship with Martin and the others would be disclosed in the registration statement and thereby provide additional marketing value for a public offering. Prestige value would accrue to the minority business seeking capital through the securities markets, and the process could become a leading avenue for affirmative action strictly through the operation of capitalism.

A prototype for contract securities could be initiated as a joint venture between the Small Business Administration and the Securities and Exchange Commission. If that is done, the Congress could then initiate legislation to help minority business gain a foothold in the securities markets. This proposed legislation would require brokerage firms, the market makers, to have a certain percentage of their stock inventory in minority-owned public companies.

That would make it necessary for the SEC to keep statistics on which public companies are minority owned. And that in turn would bring minority business to the forefront of the securities industry.

Another legislative suggestion might be to create a special class of stock that would preferentially be owned by minorities. A minority class B common stock might have special voting privileges or other clauses that would protect minority interests. Rules such as these could help usher in a new era of minority business as a major sector of the country's multi-billion-dollar securities industry. It may be just a question of getting the ball rolling.

Gary Mizel, who serves as a liaison between minority businesses and the investment banking community, wrote this commentary for Hispanic Business magazine.

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