After thinking about the Reg. D boys (Series B and C) for a few days, and their possible actions and influence on the market, I decided to collect my thoughts and have the board critique them.
It seems to me that it is in the Big 5's interest for Ancor to stay alive, stay listed, and prosper. I'm glad I reached that conclusion and not the opposite. They have protections in place in case bad things happen to Ancor, but I don't think it is in their best interest to cause the problems. They will make the most money if Ancor takes off from here, and their interests seem largely parallel to ours.
I see no advantage for the preferred stockholders to be anywhere near their 5% limit. They have several incentives to hold preferred stock and few incentives to convert until they want to sell the common stock. In a flat to down market, they are immune to capital depreciation with preferred stock, and they "accrete" more common shares by holding.
It seems to me that their strongest motivation to convert would be the weeks following a major jump in the share price of the common stock, say after the announcement of a major OEM. If I were they, I would sell into a major rally, and then convert after I sold. If possible I would sell short, if not, sell long.
The two reasons I can think of to hold common stock are 1) the ability to sell long if necessary (i.e., short sales not allowed) and 2) lower taxes for common shares held 12 or 18 months.
I'm guessing that they would prefer to take a sure quick gain of 100-200% than a potential long gain of 1000%. If that is the case, and the market jumps quickly to $2-3 or more, I would sell all that I could without dousing the fire, selling short if possible. Then I would convert Series B shares for the first few days as necessary to cover the sales of common stock I made. Since I know how many shares I've sold, I convert only as many preferred shares as necessary to eliminate market risk. If I am willing to assume some market risk, I might convert more preferred shares than I need to cover and get a lower buy price.
I would not convert any Series C shares (if I have both) for the first week or two. These are the more valuable preferred shares because they have a higher accretion, but more importantly because they have a more attractive conversion rate in a rapidly rising market.
One big difference between the Big 5 and us is that they get to trade retroactively, and of this I am extremely jealous. I have always thought that I would be a better investor if I could rewind the clock and undo some of the trades I've made and make some that I haven't. Their conversion agreement allows them to do this to some degree.
The Series B holders pay 85% of the average of the last five days closing bid. The Series C holders get to look back over the past 3 weeks (17 days actually) and pay the average of the three lowest prices. The first two weeks of a major rise doesn't even touch their conversion price. If the rally lasted more than a week I would probably switch over to converting Series C before their frozen price melted. By the third or fourth week I might be hoping for a dip and switch back to using up more Series B shares.
All of the selling for the first few weeks of a major rally can be common shares purchased at pre-rally prices and sold with no market risk. Sounds good to me. I see no need to hold common shares unless that is the only way that I can sell into a rally. If I have to sell long, I would convert and hold until the ability to sell short was regained.
It might be nice to hold onto a few shares to pass on to the grandchildren, or other long term interests. Or you might think that the rise in price will be gradual rather than abrupt, and you were willing to assume some market risk for the greater gain.
It seemly likely to me that we will stay in this price neighborhood until we get some OEM announcements. We may see a rise in anticipation of an announcement like we did earlier with Sun. I think the preferred stockholders would prefer a complete surprise, but it may not work out this way.
The scenario I've painted assumes that the preferred holders are not interested in taking control of the company, nor are they expecting Ancor to be bought out in the near future. These expectations would alter their actions significantly from what I have described above.
I would enjoy reading other potential scenarios, or to have holes poked in the one described above. Since I have never been a funds manager, I'm sure my plan is naive and has overlooked several key issues. Please point them out.
Greg |
