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Technology Stocks : Winstar Comm. (WCII) -- Ignore unavailable to you. Want to Upgrade?

To: Steven Bowen who wrote (5205)	4/15/1998 10:02:00 AM
From: Steven Bowen	Respond to of 12468

This is a copy of a reply I received on Yahoo for those of you who don't follow that thread. Gentleman Boyle, thanks, and I hope you don't mind. (PS who are you, can/do you post to SI). I thought it was interesting enough it deserved to be posted here. Re the convertibles: The top is coming down. gentleman-boyle Apr 15 1998 9:46AM EDT Mr. Bowen: I think we all agree that the convertibles seem destined to be converted in the near future. Hypothetically and rhetorically, if you were Ms. (dis)Comfort, and your clients were enjoying a nearly risk-free 14% per annum, despite the conversion feature, would it be in their interest to convert? Let's not forget that Winstar is also her client. However, gauging her history of downgrades and conservativism, it appears that she is aiding the holders. After all, these convertibles are a nearly-risk-free component in their portfolio. So, having assumed conversion, the additional shares would come to market, and would have consequences to several stakeholders. First to Winstar, the debt is converted to equity, and there is a shift in WACC. Is it desirable? I can't answer because I don't know how JR wants to be capitalized. Dilution will occur, this is obivous, unless WCII does a repurchase (let's not hold our breaths). From Modigiliani and Miller, the cost of equity for our high P/E is cheap compared to the cost of debt (relative to earnings), as long as operating risk does not fundamentally change and Rwacc does not fundamentally change. Again, Rwacc will shift due to the conversion, so the natural question is will JR issue more debt? Perhaps, it would be nice to have more cash for more acquisitions. Also, because of Vogel's reassessment of such risk as being lower, the cost of either debt or equity should be lower than current costs (Rdebt and Requity). As for shareholders, if such a scenario were to occur, and the market (investors and analysts) were naive to such an event occuring, then would it not seem unreasonable for a short term dip to occur and thereafter, a return to run-ups as a result of the higher valuations associated with reduced operating risk and a healthier balance sheet? SteveB, many Kudos to you and the gang on SI. Although, I reserve any kind words inadvertantly cast to that annoyance going by the name of Fink. If I were a Yalie, I'd do my best to prevent him from further disparaging the credibility of that institution, regardles of his association. Perhaps his e-name was a nickname given to him by his older siblings.