Hi, bullrider!
The stock options rights plan does not necessarily improve the economical value of the stock right now. For now they do not constitute a taxable event. A taxable event is created when they are exercised and a long position ends up with a gain from selling the newly issued common stock.
If you are interested how many are adopted right now, then try this query and look at the names: search.news.yahoo.com
Companies mentioned there: ITEQ, Loewe, SOL,Artisoft, TSII,CPBI,SXNB,TUR,ARDM,CTS
The ill fated CYTO did one near end of June. It did pump the price for a short run, but the news about the right was commingled with some approval (Quadramet) news. Also SIEB did one, with little success for now.
How do they work, when they work:
The issued right is indeed a stock option, but the ultimate right to waive it is at the sole discretion of the management. If it is waived in favor of an acquisition, because the managememt gets some better alternatives for their pockets, this happens at the expense of the ordinary shareholder, who gets one nickel "redemption value".
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AVNT: "The Stockholder Rights Plan is designed to guard against partial tender offers and other abusive tactics that might be used to gain control of Avant! without paying all stockholders a fair price for their shares. Establishing this plan will not prevent a take-over, but will encourage those interested in acquiring the company to first negotiate with the BOARD. The Plan is not being established in response to any known effort to acquire control of the company. "
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If the management tends not to waive the options, an acquirer has to take the effect of the then incurred heavy dilution into his offering, as he - the acquirer is usually exempted from the conversion. Therefore we will have to look into the SEC filing then.
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AVNT: "The rights may be redeemed for one cent per right at the option of the Board of Directors prior to the acquisition by a person or group of beneficial ownership of 15 percent or more of Avant! common stock."
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What could happen to rights: see Barrington Petroleum
biz.yahoo.com
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CALGARY, Sept 3 (Reuters) - Barrington Petroleum Ltd. (BPL.TO - news) on Thursday conceded defeat in its quest for a white knight to top a C$220-million hostile takeover bid from Sunoma Energy Corp., admitting that no potential rival bidders were in the wings.
Calgary-based Barrington also said it had WAIVED ITS SHAREHLDER RIGHTS PLAN, clearing the way for privately held Sunoma to start acquiring stock under its C$3.75 cash offer before a deadline set for Friday.
In a statement, Barrington, which had hoped to garner a competing bid by as late as Wednesday, said: ''There are no longer any interested parties engaged in discussions regarding a superior offer.''
''The board has further resolved to ensure an orderly transition of the corporation's assets, operations and staff to Sunoma Energy Corp.,'' it said.
Calgary-based Sunoma, owned by Chief Executive Rick MacDermott and funds managed by Fort Worth, Tex.-based Natural Gas Partners Group, launched the offer in early August, asserting the cash bid was more than fair to barrington shareholders.
Barrington's board quickly implemented a poison pill and began a search for alternative bids. The board and its financial advisers later said the bid not reflect the underlying value of the company.
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The rights plan is known as "poison pill"...
A funny one is those of CPBI (Central pacific Bancshares):
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CPB sets holder rights plan
HONOLULU, Aug 27 (Reuters) - CPB Inc., holding company of Central Pacific Bank, said Thursday its board had adopted a shareholder rights plan with a 15 percent trigger.
The company said in a statement the plan is not being adopted in response to any known effort to acquire the company but is intended to protect long-term value for shareholders.
The board also declared a dividend of one preferred share purchase right on each outstanding common share, to be paid Sept. 16, CPB said.
The rights expire on August 26, 2008.
They may be exercised only if certain conditions are met, such as the acquisition of 15 percent or more of CPB common stock or the acquisition of 10 percent or more by an entity determined by the board to be ''an adverse person.'' "
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Determined by the board to be adverse... (Raises the question "who is adverse"? But see below.)
When it is two-staged - here the case - 1.) the right to buy a preferred share and to infuse money, 2.) The right to convert the preferred share into common, it is more complicated as the preferred itself may contain certain redemption clauses.
You could go even so far that they effectively prevent a takeover but at the expense of the ordinary shareholder, not the management. So they make things worse and shareholders "claims" in the company a bit diluted.
The bottomline:
The ordinary shareholder gives away a lot for one nickel, namely some material, not formal rights in the company. It grants an option to the board against company stock and a part of its shareholders (the 15% one) for cash.
For short positions it means: At present nothing happens, 1 share AVNT stays the same. If rights are granted and exercised once, you will end up with an indefinite additional short position valued at $200 and +100$ cash in the account.
From the worriesome AVNT release it is still not clear whether this applies for:
a) 1000 common shares - giving the right a maximum value of 10 cents
or b) for 1 common share - givimg the right a max of $100 per share.
In theory, the worst outcome for a short position could happen like this:
Consider a heavily shorted stock, (like Biotime with 23% of the float being shorted). Now a fake bidder appears buying 15% of the stock from management. The management learns that and decides to let the rights be exercised. The shareholders exercise, as they get more than a nickel and the shorts are upbeat.
As so many companies - especially the ones I mentioned above, which are beaten down much more than the average market, employ rights plans, I still think about what's going on.
Are they done for real (and to raid short sellers) or just to feed the long animal with neat words, but scare the shorts...
(Personally I am not scared and I will leverage my short position based on price and market action on Tue).
Christian |
