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Technology Stocks : VALENCE TECHNOLOGY (VLNC) -- Ignore unavailable to you. Want to Upgrade?

To: HQ who wrote (5989)	12/14/1998 8:51:00 PM
From: Zeev Hed	Read Replies (2) \| Respond to of 27311

HellQat, I do not know how to say it more specifically, the death spiral scenario is DEAD. Normal hedging is another story and not particularly problematic for the stocks. Namely, there is no risk of seeing huge dilution of current share holders. Yet, CC itself is not in the habit on taking gambles on stock. If they knew absolutely that the stock would triple in a year, they would have offered much more then their $15 MM, and Lev had to go other places (including Berg) for additional money. Thus the conclusion is that they don not know (nor do we) that the stock will triple. Well, they have $15 MM laying down on that stock on which they are getting paid, I believe some 7% interest. Make the calculation yourself, with the new tranche, this is $15 MM committed, that is $1.05 MM per year in interest. Now, what if they could keep being paid this, without having their $15 MM committed? That would be a nice income on no money (we call this infinite interest rate) invested. How can they do that? Simple, they go right now (and let say for a second that this action does not interrupt the market), and they sell short 2.5 MM shares at $8.5/share. They collect $21.25 MM, namely they pocket on the spot $6.25 MM and will continue and get $1.05 MM per year after having taken all their money off the table and another $6.5 MM, until the debenture is called or converted. At that time, they convert and deliver the 2.5 MM shares against their short position. That is how a hedge fund works. If they knew ahead of time that the stock will go to $20, they may wait until then, they may even make a judgment that the stock will rise slowly and decide to short slowly at increasing prices as the stock rises, I do not know how much market risks they are willing to take, but most hedge funds do not take market risks at all, they short as soon as feasible even at the conversion price since they are guarranteed the interest on zero investment. The risk is that they cannot lay out the short before the stock declines below the ceiling, but apparently they have taken most of that risk out of the equation by now. The existence of that risk is what put the floorless issue their in the first place. Zeev