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Biotech / Medical : Ligand (LGND) Breakout! -- Ignore unavailable to you. Want to Upgrade?

To: Andrew H who wrote (12302)	12/8/1997 7:57:00 PM
From: Henry Niman	Read Replies (4) \| Respond to of 32384

Andy, Let me briefly review Farallon's arbitrage position. They shorted two share of LGND for every share of ALRIZ they bought. For simplicity I'll use a LGND price of $12 and an ALRIZ price of $24. Farallon would short 2 shares of LGND and buy 1 share of ALRIZ. The ALRIZ would convert into 1 share of ALRI and 2 shares of LGNDW. When LGND called ALRI for $22, Farallon would use $14.50 of the $22 to exercise the LGNDW and take the two LGND share from tye exercise to cover the two shorted shares. That would give them a profit of $7.50. However, when Farallon did much of their shorting, ALRIZ was only selling for 1 1/2 X LGND. Thus only $18 of the $24 obtained in the initial short would be required, so they would start out $6 ahead of the above example. LGND did call ALRI for $22, but they gave out stock instead of all cash. Thus, Farallon had potentially more LGND than they needed to cover. Friday's filing indicated that they took the LGND stock received for ALRI and covered the shorting that they did during the timeframe when the conversion rate was being determined (they artificially lowered the closing price of LGND so they would get more LGND when ALRI converted). They then took the remaining LGND and used it to cover 1/2 of their short position. Now they have 3.4 million LGNDW and are still short 1.7 million LGND. They can use the cash they received from LGND to exercise 1.7 million LGNDW to finish covering. After that they will have 1.7 million LGNDW which represents their profit for taking out the arbitrage position. The question is what they will now do with the 1.7 million LGNDW they have left after covering. Because of the way the arbitrage position was constructed, there is no need to buy LGND to cover their short position (they get 50% more LGND than they need because Ligand gave them LGND stock instead of cash).