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Biotech / Medical : ARIAD Pharmaceuticals
ARIA 23.990.0%Feb 17 4:00 PM EST
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To: Biomaven who wrote (630)8/9/1999 10:12:00 PM
From: LLCF  Read Replies (1) of 4474
 
<Remember the company has the right to redeem the convertible under certain circumstances, and so his position is not risk free. For example, if Hoechst decided to gobble ARIA, they would potentially be at risk.>

Yes, potentially.... but we know who wrote the contract and I'll bet dollars to doughnuts it's iron clad. Lets say HOE paid $10 tomorrow... well the strike price is still the lowest 4 bids over the past 22 days. I'm sure a company redemption would leave provision for partial exercise, in any case... we'd have to look at the exact contract but these guys know what they're doing IMO. The whole purpose of the contract is to trade against it... look at the nature of the thing, it's a convertible... it has an imbedded option.

<Let's assume the bad boy has shorted a million shares at 1 1/8. Now what is his incentive to wait more than 22 days before exercising and lock in his guaranteed profit? >

But you see, this is exactly my point... they would NEVER exercise NOW! Lets assume that the closing bid was 1 1/8 over each of the past 4 days. They have a free look see for 18 days [22-4] to see where the stock goes. In fact they would be foolish to exercise now under this scenario because they have NO RISK OF A RALLY, only upside if the stock falls. Worse... each time they manage to hold the stock at lower levels for 4 days the strike price FOR THE ENTIRE ISSUE RATCHETS DOWN to the new level and any previous shorts are locked in.

What is not widely understood on the street is how onerous this really is on the seller and what a true scam it really is by the buyer... I'm just coming to the realization apon looking at 3 or 4 of these things now and seeing strange names as the buyers. Never funds always private pools. I challange anyone to find a hole in my scenario. These bad boys probably pick companies they believe have a decent shot in the long run... make their investment back shorting and exercising [taking it out of the shareholders hide, leaving the cash in the company] and take a HUGE stake for nothing at the end.

It's a beautiful contract really... very hard to understand without options knowledge. And certainly too hard for your average CFO of a small company who most likely has no derivative experience and can't afford to hire an investment banker. I guess I'd consider myself potentially wrong if someone from one of these companies could tell me THEY sought out a deal like this, but sadly I'm sure we all know who brought the deal to who.

DAK
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