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Since I last posted on this subject on Oct 22, 1998, the puts are down from 17 bid to 12 1/2 bid. Assuming that the puts were bought by an institution who also owned the debenture stock, and that they paid a premium of 3-4 points for the privilege, what they wind up with is a big loss on the puts but a counter-balancing gain on the increase in value of the debenture options. This essentially softens the blow on the downside and gives the options, which can only be called in 2003 (if I remember correctly) the chance to recover toward the conversion price which I estimate to be around 34. I may be wrong about this transaction and its purpose but it is a well known tactic in the investment community to buy the convertible and sell the stock short. For my money, this practice should be disallowed until the stock is registered at least. I guess that the justification for it is that until registration, these are private market transactions. But the put buying was apparently done in the public market and no doubt much of the short selling. I am not positive, but I think that it is illegal for a brokerage firm to publicly trade the stock in any fashion until it is registered. Doubtless they have some mickey mouse way of getting around this but that might not hold up in court. I haven't done the research but I am not aware that this has ever been tested. Might be the subject of a meritorious class action suit against people like Solomon Smith Barney and Morgan Stanley if they allowed buyers of the debentures to short the stock before registration. For me its a case of "alls well that ends well", so I'm not persuing thoughts of damages at this time. I have however learned (or reinforced) some investment lessons from this experience. From now on, whenever I hear the words "convertable debentures", I am going to run as fast as I can to escape the carnage sure to follow. I may even buy puts to bet on the downside. When it appears that the stock has bottomed, I'll beg, borrow and steal as much money as I can to buy the stock back for the inevitable round trip, assuming no big change in the company's fundamentals. jp |
