So AOL effectively bundled cheap 5 year $104 call options with their debt issue, in return for a subsidized (4%) interest rate.
I disagree with Roger that the "overhang" of 3.3 million $104 call options will effectively cap AOL's price at $104. What about their outstanding employee stock options? Aren't they of greater number, nearer maturity and lower strike price? Personally I don't think AOL justifies a share price of $104, but I don't think the effect of this convertible debt will be material.
What can we expect the holders of these cheap call options to do? Unless they are interested in possessing cheap call options, one can expect them to hedge, e.g., turn around and sell expensive call options (i.e., on the standardized options market), or take an appropriately sized fractional short position.
I don't think there's anything really sinister here, it is just another way of AOL effectively raising capital by (synthetically) issuing new shares. Since AOL's stock price is extremely high, this does not dilute existing shareholder value, in fact it will likely be accretive. In return for all exisiting shareholders sacrificing about 3% dilution, they get about $3 per share of cash.
As in any pyramid or Ponzi scheme, existing entrants benefit (in fact they depend on) new entrants participating.
- Daniel |
