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Biotech / Medical : Techniclone (TCLN)
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To: Maurice Winn who wrote (2656)10/19/1998 8:06:00 PM
From: EPS  Read Replies (2) of 3702
 
"Don't be fooled into believing that just because you are with
the rest of the world it necessarily follows that you are right".

I like that a lot Maurice! Now imagine that company X is authorized to issue 100 shares. After a while the price of the shares is $1. Company has no earnings but is on the trial stages of some stuff that could be good for something...Shareholders are told that it would be good for the value of the company (and its purpose) to increase the price of their shares by means of reducing the number of shares. They are given 10 good reasons to do so. (Which I will not disclose..) A 2 for 1 reverse split is approved! Shareholders get to keep half of their shares and the price has doubled to $2.

Experiments continue to produce good results that need further experiments.. Management needs to keep operations and research going..markets become more concerned about the bottom line and speculative investments loose favor among investors...

The company still has the right to issue 100 shares but now only 50 shares are out. The company starts to sell shares at market value which at this point is less than 1 1/2.

A certain character at SI (named Victor for the sake of the argument) announces that he supports this as well as other private placements to get money that is badly needed: its either that or we will have to close research operations and throw away all our investment.

Before too long the price of the shares is again close to $1 and the company faces the same problems that originated the reverse split.

Maurice: we all agree that less shares will be great. We all agree!!
It is just that the market has valued the shares at their current levels... Ok, you say let's increase the price so that the market finally understands that the shares were undervalued! We'll do that by collectively giving up our shares and giving more power to management to do what..needs to be done?

Qn: But what is value? Is the story the value? Is the story going to change if the number of shares is 1/2 of what it is was?

Ans: Yes it will change because we'll be able to buy the stock on margin.

Qn: Will the volatility increase then?

Ans: Yes.

Qn: Will the risk of having a no earning stock at a high valuation increase?

Ans; Yes, it will.

Qn: will it be better to have NAZ listing?

Ans: Yes

Qn: If NAZ listing is achieved will that guarantee that money managers will necessarily get into the story?

Ans: No

Qn: What is more likely to happen if a reverse split happens?

Ans: for all the good and bad reasons the stock will tend to fall.

Qn: But were is Maurice's logic wrong? If splits tend to increase the price of the stock (contrary to what simple minded logic would predict) by increasing the size of the float why isn't it that reverse splits (with more reason) don't increase the price of the stock as well.

Ans: Because reverse splits are usually done from a position of weakness (like no earnings, or decreasing earnings) while splits are done from a position of strength (our earnings are increasing so fast that even if we double the number of shares our PE will not increase!)

Qn: Is the newly acquired value due to earnings? (i.e. is the PE going to double when we take half of the shares off the table?)

Ans: No there are no earnings we can speak of

Qn: If the shares are undervalued now why is it that we (the only ones so far who have realized this fact) don't buy more of them right now?

Ans: We are in pain we have no more money for speculative investments right now.

Qn: Why isn't it that you, Maurice, who sold at a higher price, don't buy now?

Ans: Because the company does not agree to do a reverse split!?

QN: And if it is true that we don't have money and margin calls are eating away at portfolios why isn't it that the company itself doesn't use some of the new -hard to get- money to buy some of those shares back??

Now, from this to Hitler, slavery, Orwell and Jerry Falwell: wow! Now that is wild!! Take a deep breath. I'm sure you're making money and you will make more money! You don't have to be right all the time to make money. Some people make money making the wrong assumptions and drawing the wrong conclusions! Happens all the time.

Now, that is a nice theorem Maurice. Hope you agree with me on that at least.

Victor
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