Hi Andreas. I agree "As a long term investment being short the shares and long the warrants does not make any sense."
Nevertheless, it might make sense for an arbitrageur such as Farallon, which I assume falls in the 'big boy' category. Big guys can short a stock and get the 'proceeds' from the sale. For example, assume F had 100 LGNDW. They could then short 100 LGND, have no net exposure to Ligand and get $1,412.50 to invest assuming they did it at the close on Friday. Arbs can invest at a lot higher rate than the interest rate implied by the premium ($1.1875 per share based on Friday's close) on the warrant. The warrant premium will decline to zero on the last exercise date so F will lose that as compared to selling the warrant now. But, the earnings an arb can generate on the $1,412.50 short proceeds should easily be 2 or 3 times that, again with essentially zero risk.
Arbs are not in the business of taking risks, so I would be surprised if F has any material exposure to Ligand. I think they would just as soon liquidate their position, but it is too big and the warrant trading volume too low to sell much of it without taking a hair cut. The common stock trades more actively, thus facilitating the short sales.
Regards,
Walter |
