Unless I am mistaken, there are two parallel discussions occurring on this board for which an important link has yet to be made. First came the discussion of the use of short-selling as a means to drive down the cost of warrants/notes received in the August secondary offering. Secondly, it was brought to our attention that Eastern Capital took down 11 million shares as a participant in that offering. Despite an August 13G filing, Eastern Capital is nowhere to be seen on the listing of institutional ownership. It looks like Eastern Capital is pursuing exactly the strategy described by Adam Feuerstein. Any thoughts?
"First came the discussion of the use of short-selling as a means to drive down the cost of warrants/notes received in the August secondary offering." This is another example of repeating an inaccuracy enough times and eventually it becomes accepted fact. There were no warrants attached to the equity offering. It is not a pig with a different color lipstick. There was a simultaneous stock offering and convertible offering. Other than timing they were not linked. Traditional hedge strategies employ a simultaneous ownership of offsetting instruments, one side long and one side short. It can be debt, equity or options. The equity offering and the convertible are both instruments that appreciate with a rise in stock price, one does not offset the other. Both or either can be part of a hedge strategy, but the hedger would have to go out on the open market and establish his short or option strategy.
Eastern Capital is apparently out of EXEL. They got to buy the stock at a substantial discount to retail, $4.25 per share. Obviously they have scalped their profit and gone home. They may or may not have hedged their original position. The stock offering put a substantial number of shares in the hands of traders who may or may not be interested in the long term and the convertible does incentivize shorting at or above the conversion price of $5.31. Interestingly, GS owns 5,110,651 shares of EXEL. As amoral as they are, they do not blatantly break the law or routinely screw their investment banking corporate customers. When you can already legally manipulate the system and create your own rules, it does not make sense to have hidden accounts and off the books investments.
Fair point Ernie. I brought the warrants into the discussion, because I remembered the reference in Feuerstein's article. The probable tactic used by Dart pertains to the concurrent purchase of the convertible arm of the transaction with his purchase of the equities. Here was how the strategy was described in that article. "Let us take a closer look at what investors in the Exelixis financing are likely doing: A hedge fund buys Exelixis common stock, in size, at $4.25 per share and has the ability to own more stock at $5.31 per share at some point in the future with the convertible arm. Therefore, any time Exelixis' stock price rises above $4.25 by a reasonable amount, the hedge fund can short the stock and use profits from that short sale to pay for the convertible stock.
For instance, days, weeks or months later, if Exelixis' stock is trading at $5.50 and the hedge fund bought 10 million shares in the financing deal, it could short 10 million shares and "arbitrage" the profits. [Since the hedge fund owns 10 million shares at $4.25, it profits from the cost basis of the short versus its long position received in the deal at $4.25.] The fund then takes those profits and uses them to pay for the convertible arm in full, or reduces the cost basis of the convertible."
Kenneth Dart is described as a shrewd investor. With the opportunity for "free money" on this transaction, it would seem that Dart had access to this deal, the resources to execute it, and the acumen to recognize the opportunity. My guess is that any equity position held by Dart nets out the number of shares he is presently shorting and leaves him with a minimal effective ownership while he plays his short trades of the original equity position taken in secondary offering. The fact that this stock has traded with such volatility, yet stayed within the range of $4.25 and $5.30 since August leads me to believe that investors like Dart are executing on a strategy to reduce their cost-basis in the convertible arm of the transaction.
"Interestingly, GS owns 5,110,651 shares of EXEL. As amoral as they are, they do not blatantly break the law or routinely screw their investment banking corporate customers."
Oh boy Ernie...for someone so versed about the science aspect of things, you continue to have your head buried deep DEEEEEEEEEEP in the sand when it comes to the investment world. GS doesn't break the law or routinely screw their IB customers?? LMAO!!! Guess you slept during the real estate debacle (GS touting and selling garbage paper to its customers as "grade A" stuff when they knew it was garbage...then they SHORTED the shote out of it after they sold). WAKE UP ERNIE. You still have those rose colored glasses on when it comes to EXEL. You cannot accept the fact you are in over your head here. You know science. You don't know "the game". Period. That is why you have nothing to show for your EXEL holding in the face of a monster biotech rally these past few years. EXEL languishes near its lows.
Whatever you think the current situation appears to be that Eastern has sold and taken profits already. Correct or not? Why else no position listed. Meanwhile we read institutions/hedge funds have been accumulating stock as per latest figures. So all the stock got absorbed in the market or crossed out. Meanwhile there is still incentive to have the convertible and or stock held by whomever rise. If the short position is in fact naked, then this is even better for longs, as if you read about the CABO situation, along with various (many) other partnerships and deals ALL progressing along, this could be one big short squeeze. So which is it, some hedged situation or pure short players? Either way I like it, but hey, if we have a huge naked short position here, BUY ALL THE STOCK YOU CAN GET YOUR HANDS ON. IN MY OPINION, OF COURSE.