There are others more qualified than I am to respond, but I offer the following thoughts:
It is true that RG may have established a hedge against their convertible preferred (key word: may -- we do NOT know if they have yet) and had they done so, the selling from the establishment of the short position would certainly bring the price down which might explain the recent downward price movement (though not the low volumes prior to today) - however, as I understand it, it would have been much more logical for them to establish the short position when the stock price was 20-30% above their conversion ceiling of $10.79 per share (which it has NOT been since the PP closed), rather than in the past 2-4 weeks at prices at, near or below their floor (which is effectively $7.85 until 2/17/00). For example, Dr. Zeev Hed, who seems quite knowledgeable on the subject, theorized on this Board (and on the floorless debenture board) that there would be an effective $13 ceiling as long as RG did not convert, because they would be likely to establish a hedge anytime the price rose to $13 or so, which would then move the price down. I do not recall him theorizing that they would do so between 8 and 10, though I welcome his input (he is one of the more qualified people to answer your question).
The theory behind the hedge is to lock in profit because RG can use the conversion shares to cover the short position if the price goes up dramatically, and the conversion shares have a $10.79 ceiling. This is especially true if RG knows that in the short term, there is unlikely to be any development which will spike the price that much. In essence, if they short at $13, they can make significant bucks by selling short near 13 (which likely drives the price down), covering in the open market near 9-10 (which brings the price back up), shorting again at 13, and so on, until events overtake the trading strategy and dictate which direction the stock is really going to go for the long haul (knowing all the time that their back is covered with the -- worst case -- $10.79 conversion shares). So, for example, if BIG NEWS hits, and drives the price to 15-20, they can cover with the $10.79 conversion shares (so, in a worst case scenario, which is the spike occurring very soon after the hedge is esablished, they lock in a minimum of $2-3 in profit even if the stock spikes up aggressively while they are still in a short position, which is a 15-25% return over a very short period if the price goes up fast, and potentially a lot more than that if it keeps going up and down without really ever going above 13 because they keep covering in the open market and selling every time the stock gets back to their hedge level of $13). Along the way, they can always cover in the open market if the pricing cooperates, using the $10.79 conversion shares to cover only if there is an unexpected and sharp upward spike. FWIW, the PP restricted them from establishing a short position prior to the 8/17 date, and the stock has not traded above 10.79 for any meaningful portion of the period since 8/17. It also restricts them from manipulative trading practices, but that is another story.
Of course, such a strategy is still somewhat contrary to RG's underlying investment -- because they presumably invested the $20 MM in ATG (as they have the $50 MM in CMGI) because they think it is going to make them a lot of money, not to play some short term hedging game that potentially makes them money in the short term, but may cost them the really dramatic upside of their investment if big news hits sooner rather than later. And because the trading activity involves trading costs (interest, commissions, etc.) that eats into their overall return.
The price action of the last 2 weeks has established a new conversion price at or near the $7.85 floor (VT Trader on Yahoo said the floor is now the conversion price, but I thought the 8-K said that it was the average closing price on the lowest 5 trading days over the 22 trading day period prior to the Conversion Date, which for now is over the $7.85 figure, but may well be less than that soon enough if the stock does not close above 7 7/8 for the next 2 trading days). Which means they are at worst 2 days away from establishing a $7.85 conversion price, but only for the next 17 trading days. So if they shorted right after the PP closed (at 10 and in the 9's), they can (i) cover now in the open market (e.g., without converting at a profit) which would cause the stock price to rise, but make them a decent amount of money, or (ii) cover within the next 17 days even if the stock price exceeds their $7.85 conversion price using their conversion shares or in the open market (as long as the stock does not spike above their short price). Of course, if the stock spiked to double digits, their profit would be locked in (in both directions) and the strategy would divest them of their greater upside (unless they reenter the market after that cover is complete), which again seems to be contrary to why they made the investment in the first place.
Another possibility is that RG may not have established the short position as a hedge, at least not yet, but that others without conversion shares may have done so, thinking RG would do so or misreading the RG PP as a floorless (which it is not until 2/17/00, by which time ATG should have some real earnings, a National Market System listing, analyst coverage, other revenue producing systems about to launch, a subsidiary about to go public (GA) and thus an entirely different investment profile). This also would have dropped the price in the short term (shorts selling into a tentative or declining market will do that), and those folks may have started covering today (or will have to cover by buying shares at some point, creating the possibility of a short squeeze).
Yet another possibility is that RG may actually convert once the conversion price is established at or about $7.85, because, contrary to Auric and Suess (who know next to nothing about the Company between them, but consider themselves masters of the universe when it comes to identifying fraudulent BB stocks, which based on their view of ATG is, in my opinion, a questionable self-assessment), RG may view $7.85 as the best conversion price they are likely to get, and they may take the bird in the hand -- but the fact is that they have at least 3 weeks (possibly more if the price continues at this level much longer) to decide that one, and from what I can tell, no incentive to decide even a day before they have to.
So we will have to wait and see what is really the truth. If RG in fact does convert in the next 3-4 weeks, that will be a very bullish indicator, because (i) it removes any possibility of the RG PP being a floorless after 2/17/00, which will scare the crap out of the shorts who are relying on that as the basis for their trading strategy, (ii) it would take away the $13 ceiling Dr. Hed theorized prior to conversion which frees the upside somewhat, and (iii) it would reflect some sense on the part of RG, which is much closer to the center of ATG's gravity than any of us are, that $7.85 is a good conversion price, and likely to be the best they will do.
That is my spin on your question - another diatribe, I suppose, but even as such, it is an incomplete picture. I do think it is fair to say that all this fun and games in trading (hedges, short selling into weakness, short squeezing, etc.) don't mean squat next to the true success or failure of the company itself. Which is to say a great company will put any short selling or hedging strategy out of business, just as a bad company will put a long strategy out of business.
But I do not accept the notion that ATG is a fraudulent, pump and dump go to zero -- in that regard, I think Auric and Suess are way too full of themselves, and will eventually get slapped, although I'm sure, as self-appointed masters of the universe, they will be long gone, or at least they will tell us they were, when that plays itself out. If ATG succeeds, they will tell us that they made lots of money during this period (when they preyed on unfounded fear), but will never admit that they were wrong about the company. And with ATG, which is not a fraud, not a P & D and not in any type of financial trouble right now, AG and Suess can only make money preying on uncertainty and fear, which they have done pretty effectively so far, with ATG cooperating to some extent by pursuing its business plan diligently and without hype, rather than by hyping the stock through phony press releases and other means. And for my part, I could care less, because it is not my money or stock they are preying on.
Hope that helps.
MST |
