The Big Business of Losses (RYL, LEA)

There has been a trend developing among some of the biggest losers toward adopting stockholder rights plans to preserve net operating loss carryforwards. Auto-part suppliers and homebuilders have been some of the companies adopting these plans.

The shareholder rights plans protects against ownership change (Section 382), which would limit the use of the net operating loss carryforwards. Companies would be penalized from using these tax credits if a stockholder owning 5% or more of the stock increases their collective ownership by more than 50 percentage points over a defined period of time.

Yesterday, homebuilder Ryland Group (NYSE: RYL) and auto parts maker Lear (NYSE: LEA) both announced plans. Anther homebuilder, Hovnanian Enterprises (NYSE: HOV), adopted a similar plan in August.

These losses may provide huge tax benefits in the future and it is wise for the companies to protect these "assets." Once the companies return to profitability, which may in some cases be a far-fetched scenario, they can significantly lower their tax burden by using the loss carryforwards. The loss carryforwards may also be attractive to potential merger partners.

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