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Technology Stocks : Amazon.com, Inc. (AMZN)
AMZN 230.84-0.7%3:59 PM EST
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To: Glenn D. Rudolph who wrote (3987)5/5/1998 5:39:00 PM
From: Gary Korn  Read Replies (1) of 164684
 
The current market cap of AMZN is 2.2B. The lender assumes that AMZN can dilute to pay back the loan. If AMZN diluted 2:1, it would have $1.1B to pay back (reducing its market cap, of course, to $1.1B and its share price to 47ish).

I think this is playing both ends of the stick against the middle (is that the phrase)? That is, the lenders know full well that AMZN will have to do a secondary to pay back the debt (or refinance it). I think they assume that AMZN will never pay a dollar of operating income into this debt.

The shareholders (current shareholders) like the debt because it avoids dilution for the time being. But it is inevitable dilution down the road. At some point, the piper must be paid.

Let me say this another way: The people who took on the debt assume that the market cap. is high enough, and will increase enough, to assure that there will be enough market cap down the road to allow for dilution to pay back the debt. On the other hand, the people who own the stock now -- or are buying now for the first time -- are hoping that the market cap will increase down the road. But the problem is that some portion of the market cap will have to be used down the road -- through dilution -- to pay back the debt. The debtholders and the shareholders are at cross-purposes here.

Gary Korn
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