...they will offer shareholders a 2 for 1 (ex shareholder turns in $1000 dollars worth of share the company will then issues that shareholder $2000 dollars worth of preferred shares convertible in one year...
Rick, both you and gameaddict have not accurately summarized what Howe said regarding the buyback. Howe does start by saying "think in dollar terms not in share terms", which is probably the source of your confusion. He then says that 1000 dollars worth of stock would get you a preferred stock certificate worth 2000 shares (not "dollars worth" of preferred). You both have inferred that he misspoke and meant the latter (dollars). Not likely, and for good reason.
For you to get a given value worth of preferred, the preferred would have to have a value. This value could, obviously, either be a) fluctuating or b) fixed. Let's look at both scenarios.
A. Fluctuating
For $1000 of the common to always equal $2000 worth of the preferred, the price of the preferred would have to exactly track the common, i.e. always have a value of 1/2 the common to assure you get twice as many of them. For example, at .002 per share, you'd be trading in $1000 / .002 = 500K shares. This would then convert to 500K x 2 = 1M preferred shares.
Now let's say the price sinks to .001 (half what you paid) and I buy $1000 worth. Lucky me because my $1000 now gets me 1M shares of common-- and thus 2M of preferred! That's twice as many as you got for the same $1000 investment! I think you agree this would be unfair.
B. Fixed
For sake of argument, let's say we place a value $1 per preferred share. Thus, your $1000 would get you 1000 x 2 = 2000 preferred shares. Once again, let's say the price sinks to .001 (half what you paid) and I buy $1000 worth. Well, it's still $1000 worth so I still get 2000 shares. In fact, no matter what the fixed price of the preferred, $1000 worth of common (no matter what the purchase price) always equals the same number of preferred. By equating common stock dollars directly to preferred stock shares, it's the exact same thing as establishing a $1 per share price on the preferred.
QED
- Jeff |
