Dale,
I see your concern on dilution. I received a similar one in a direct e-mail from Dale Velkovitz and thought of pasting his question and my answer.
Sankar
On Sun, 21 Sep 1997, Dale Velkovitz wrote:
> Dear Sir:
>
> I have read your recent comments on SYQT technology on the SI board. I
> was wondering if you had meant your recent comments pertaining to the
> issuance of additonal share to actually reflect the current realities of
> the SyQuest equity placements, or if perhaps, you were attempting to
> comment on equity placements more generally.
>
> An even cursory read of the recent SyQuest Technology SEC 8-K fling
> pertaining to the latest round of financing demonstrates that the
> placement was at substantially sub-market prices and hence extremely
> dilutive to the interests of the current common shareholders. In brief
> for the sum of $3.5 million dollars SYQT placed common shares at current
> market price and issued without any additional compensation 3.5 million
> warrants (1 warrant is needed to buy 1 share), good for a seven year
> period which can be exercised at a price guaranteed not to exceed $3.05.
> As a professor of finance surely you must recognize that the value of
> these warrants calculated using B-S or any other reasonable model is
> very large relative to the $3.5 million in proceeds received, and in
> fact are crucial to understanding the cost of capital implicit in the
> transaction.
>
> Further if you carefully read through the details of the 8-K filing, you
> will find that in substance the warrants contingently become a claim
> senior to that of the common shareholders. Specifically in the event
> that SYQT undergoes a change in control the warrants must be redeemed
> for cash for their Black-Sholes value as of the day before the
Dear Dale,
You are raising a good question. I can calculate the B-S value using the
volatility, interest rate, etc. But, that is not as interesting as
extracting a potential value of SyQuest stock from their equity/ warrant
issuance action. This action gives a credible signal for the value of the
stock that is useful to outside shareholders.
Suppose that we presume that the SyQuest stock price will never exceed
$3.05, the exercise price of the warrant. Then, the B-S formula value or
any other formula value of a warrant is 0. Then, SyQuest simply sold new
equity at $2.5 per share ($3.5 mil/1.383 mil), which was the price per
share at the time of issuance of the stock. Then there is no [some]
dilution if you assume no change [decrease] in the rate of return on
investment. There will be an increase in EPS if the rate of return on
investment is expected to increase.
The key here is that we do not know what the management expects to
achieve. We can, however, make a rational inference that the earnings may
improve because of the warrants' exercise price being $3.05 which is
larger than the stock price at issuance. Jawhawk must really know better
than us about SyQuest prospect and they can be expected to have found the
warrants worth some thing, otherwise they would not have locked their
capital. To me, it sounds that Jayhawk expected the price to exceed $3.05
per share based on their understanding of the fundamentals of the company.
I thefore can safely justify the recent run up in SyQuest price.
I hope, I have addressed your question. Thank you for asking.
Good luck. |
