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Strategies & Market Trends : From the Trading Desk -- Ignore unavailable to you. Want to Upgrade?

To: steve goldman who wrote (4337)	3/17/1999 2:56:00 PM
From: CJ	Respond to of 4969

BD - TY, Steve - In the +/- 30 mins. betw. writings, it's been corrected. Amazing! All I can say is: you must be "the man"!... or a Genie.... how many wishes .... ? :) :)

To: steve goldman who wrote (4337)	3/17/1999 7:50:00 PM
From: bazooka	Read Replies (2) \| Respond to of 4969

heads up to traders. some internet stocks will be coming under heavy dilution soon. maybe we should discuss some of these things and/or warn each other before the bond conversions take place. in some instances it gives companys a reason to run up their stock because they would rather issue shares than pay high interest rates. bazooka Heard On The Street: Convertible Bonds Might Delay Internet Profits By Gregory Zuckerman, Staff Reporter of The Wall Street Journal It may take even longer than you think before your Internet stock starts turning a meaningful profit. The unlikely culprit: convertible bonds. A spate of Internet companies recently issued such bonds, often under the radar screen of investors. As much as $2.63 billion of "convertibles" -- securities with fixed-income payments, lately around 5%, that investors can convert into shares of the issuer -- has been sold since November. Look for more. For the companies, the issuance provides a boost of needed cash that can be used to bolster their businesses. So what is the problem? These convertibles will lead to a flood of new Internet shares, specialists say, slashing long-awaited earnings of many Internet companies and threatening to reduce the scarcity of shares that has helped to drive up stock prices. "It's clearly an overhang for these stocks because the convertibles weigh on earnings," says Robert Willens, an accounting expert at Lehman Brothers. Among the recent converts: At Home, CNET, Exodus Communications and Beyond.com. Amazon.com raised $1.2 billion in January in the biggest convertible sale ever. The companies wouldn't comment, or didn't return calls. Today, DoubleClick is planning to raise $200 million in convertible debt, while Citrix Systems hopes to raise $300 million. Of course, investors haven't yet needed to see earnings to make money on Internet plays. But they have bid up these stocks on the hope that big-time earnings will materialize down the road. Because these bonds will eventually convert into shares, they are counted against fully diluted earnings from the get-go. The result: The spate of convertible issuance is diluting earnings of those few Internet companies that can claim earnings, and will reduce the long-awaited earnings of most other Internet companies. The convertible-bond issuance of Beyond.com, for example, expands the company's shares by a huge three million shares, or 11%. One of the reasons Internet stocks are climbing is because few of these shares are available to investors, forcing them to bid up prices to get their hands on them. Convertibles could help to change the equation. When the convertible bonds are exchanged for stock they will cause an immediate surge in the float, or number of shares available for trading. The float of Exodus Communications will jump 53% when the company's bonds convert into stock. It typically takes two to three years before investors convert their bonds to shares, or a company initiates a conversion by redeeming its convertible bonds. But the timetable is shrinking in the Internet sector. Amazon.com's deal contained an unusual clause allowing the company to convert the bonds as soon as the stock trades at $234 for an extended period. Such a conversion will increase Amazon.com's float about 13%. Amazon.com closed at $133.8125 in Nasdaq Stock Market trading Tuesday. More Internet companies are expected to seek similar ways to speed up the conversion of their bonds into stocks, to avoid paying the fixed-income payments of the bonds. Once the bonds are converted, Internet stocks could suffer. That is because convertible-bond investors generally are hedge funds and conservative stock and bond buyers, not traditional Internet investors. Some have internal rules barring them from holding stocks. As such, they are seen as likely to dump the stocks when a conversion takes place. The shares of many convertible-bond issuers tend to lag behind the market, academics say. According to a research paper completed last month co-written by Craig Lewis, associate professor at the Owen Graduate School of Management at Vanderbilt University, shares of companies issuing convertible bonds rose 56% in the year preceding their bond sale, but just 9% the year after a sale. Most convertible-bond issuers consistently underperform the market and their peers for five years following a sale, Mr. Lewis says. For their part, Internet companies have good reasons to turn to convertible bonds. They need capital to grow, but can't turn to the bond markets or banks without earnings, and a big follow-on stock offering could hurt shares. "The least amount of dilution that can happen is with a convertible bond offering, so it's a very attractive option, and the stock market has reacted positively," says Kevin Ryan, president of DoubleClick. Some wonder if it will last. "A convertible-bond offering is a signal to the market that a company needs capital, but can't go to the debt or equity markets," Mr. Lewis says, "and that its stock will likely underperform both its own recent history, as well as the market going forward." Copyright (c) 1999 Dow Jones & Company, Inc. All Rights Reserved. 02:23 031799