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Strategies & Market Trends : Shorting stocks: Broken stocks - Analysis -- Ignore unavailable to you. Want to Upgrade?

To: chester lee who wrote (2054)	12/22/1998 5:22:00 AM
From: RockyBalboa	Respond to of 2506

I have read through John's original post naming the long BTIM arb play. THe oversubscription refers to the BTIM S-3 in which is stated that rights owners can "oversubscribe" by bidding for additional shares. BTIM therefore registered up to 50% additional shares (250k) for covering any oversubscription. Therefore, as and when the rights get a fixed price (which is the case near the separation date IMO), any arb play could make sense. As long the exercise price is floating, the rights are simply a projection of the BTIM price. From Austrian companies trading rights at the exchange in the course of a "capital augmentation" I remember the rights pricing formula which is: P (R) = (S - X) / (1 + N) or now as X is floating, (1/3 *S) / (1 + N) N:1 is the exercise ratio, S = Spot, X = fixed (or float, 33% discount) exercise price. 20 "rights" are necessary for 1 new BTIM stock. Hence: If the rights are issued on a 20:1 basis ie 20 old shares at 13.5 get the rights to 1 new share at the discount price, 9 then the equilibrium rights price is roughly 7/32 or 0.214. With the right to oversubscribe 50% (overall) the rights could therefore be valued approx. at 10/32. C.

To: chester lee who wrote (2054)	12/22/1998 11:23:00 AM
From: gringodoc	Read Replies (1) \| Respond to of 2506

Chester: Rights offerings constitute an interesting way for a firm to raise cash. I do not think that an underwriter need be involved. And theoretically if everyone exercises their rights, there is no dilution to the individual shareholder. I have been involved in several rights offerings, the most recent 2 being NTAIF (Nam Tai) and the second was either ENCD or PRIA. I was long the former and short the latter. Unfortunately I closed out my short way too early because I hadn't fully thought out the mechanics and did not wish to be short the rights. The rights will split off after being issued and trade separately. Since the rights can always be exercised at a discount to the underlying stock, it would be foolish to keep the rights and not exercise. If the rights holder does not wish to increase his holdings in the underlying stock, he should sell the rights and collect the premium. The strategy I used with NTAIF was to ask for my allotment and whatever of the overallotment I could purchase. The underlying stock often drops to the rights offering price and then bounces back. That is a good place to sell. In the future if I am short a stock that offers rights, I probably would purchase rights to cover just before the expiration date. Chester, I shared you pain with ENVY; very frustrating. I fell bad for our amigo, Pancho, who had been short SAPE and may missed the buying frenzy in the last two days because he is in Brazil spending Christmas with his wife's family... Regarding BTIM: I shorted this one during the frenzy in Oct 97 and recently covered the last of my shares. This one is a crap shoot at this point. Could go either way. My play is that if it is FDA approved, I'll short the sh*t out of it after the initial peak because I don't think the market will be as huge as the one portrayed. If approved, this should play out like ORGanogensis. If rejected, hasta lavista... Buena suerte, amigo!