Roger's 1998 Short Picks Message Board

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Strategies & Market Trends : Roger's 1998 Short Picks

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To: Roger A. Babb who wrote (10360)	6/20/1998 9:21:00 PM
From: Fernando Saldanha	Read Replies (1) of 18691

There is an interesting article in the latest issue of Forbes. The title is "Pact with the Devil," and it is about Hayes, the modem maker. Hayes issued a $45 million 6% preferred convertible, with conversion at a 15% discount. At the time the stock was trading at a split-adjusted $17. The issue was bought by hedge funds, who immediately shorted the stock. Other "speculators" also shorted, and Hayes's stock collapsed to $3.50. Hayes has stopped honoring the conversion clause and is suing the hedge funds. He has settled with seven of them, settling the conversion price at $9. This, despite the fact that the contract explicitly allowed for short selling the stock. Zitel has also entered a "pact with the devil," with similar consequences. It would be worthwhile to have a list of companies that have issued convertibles with conversion at a discount. The potential for dilution is practically unbounded, and only a desperate management would sign such a deal. Hence, such stocks should be excellent candidates for shorting.

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