Gerald, I think that most on the board understand that a normal short
position is taken in anticipation of the price going down (the shorts
are covered when the stock is bought back at a cheaper price).
However, an arbitrage position makes money regardless of price movement.
Prior to 1995 there was no listed short position in LGND. When they
acquired GLYC, the deal was all stock. There was a premium in the
coversion price. Arbitrage positions were taken that shorted LGND
and bought GLYC. As long as the acquistion was approved, the position
made money (the shorted LGND stock would not be bought back. Instead,
the GLYC shared would be converted to LGND ands these converted shares
would be used to pay back the shorted stock. There was little risk
involve. The premium quickly disappeared, but those who set up the arbitrage
position early made a significant return. It was really a smart play
because when the deal was announced, both boards had recommended the deal
and LGND's board and partners control well over 50%. GLYC had more retail
shareholders, but the final vote was something like 99% approval by
LGND shareholders and 96% approval by GLYC (at the time GLYC had a $50
million note which is to be paid back in stock at something like $26
per share which is why LGND has long term debt).
Shortly after the GLYC deal, LGND announced the creation of ALRIZ. This shell (1 employee)
was designed as an off balance sheet company that would fund the retinoid
R&D (ALRT1057, ALRT1550, ALRT268, LG100754, and dozens of other retinoids -
4 additional compounds were described in the prospectus). ALRIZ were units
that contained 2 five year warrants (LGNDW) as well as 1 callable share
(for prices ranging from $22 to $37. The exercise price of the warrants
was 20% above LGND's average price at the time (exercise price was about 7 1/8).
The units were initially offered to LGND and AGN shareholders at $10.
Overzealous shareholders (ALRIZ was never designed to make money - it
began with $100 million in the bank and simply spent it by paying
LGND and AGN to do the research) put in orders for an addition 6 million
shares and LGND had to mail back $60 million.
The ALRIZ offered yet another opportunity to short LGND and buy ALRIZ. There was a significant
discount. As long as ALRI was called (by LGND and/or AGN), the call
price would more than cover the exercise price.
Here's an example:
In Jan 1996, LGND was selling for $12 and ALRIZ was $18. 20,000 shares
of LGND are shorted, producing $240,000. That money is used to buy
10,000 shares of ALRIZ, costing $180,000. The buyer puts $60,000 in
the bank to pay off interest on the short position as well as broker
fees for the trades. The 20,000 short shares of LGND are covered by
the 20,000 warrants (LGNDW). The exercise price is independent of
LGND's future price (it was set in 1995 at 7 1/8). On June 3, 1997
the instruments seperate. At that time, the shareholder would owe
his broker 20,000 shares of LGND but would have 20,000 LGNDW as
well as 10,000 ALRI. It would cost him $142,500 to exercise the
warrants, but a call on ALRI would produce $220,000 on June 3, 1998
and $370,000 on June 3, 2000. When ALRI is called, $142,500 is used
to exercise 20,000 LGNDW. The 20,000 LGND is then used to cover
the stock owed to the broker (the position never has to buy LGND). The difference ($77,500 to $292,500) between $142,500 and
the call price is added to the initial $60,000 and that is the profit
(minus interest and broker fees). All of this was done with the broker's
money and the only requirement is a call of ALRI (which is EXTREMELY
likely because ALRI controls all of the intectual property associated
with the retinoid joint venture as well as all of the compounds
identified (except Targretin which is owned by LGND, Tazarotene which
is owned by AGN, and Panretin which can be bought back without calling
ALRI). The largest shareholders of the arbitrage position is Farollow
Capital Management and Thomas Steyer, et al. |
