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SCO and Baystar Strike a Deal
comforteagle writes "As you'll no doubt recall, SCO financier wanted to cash-in on its stock because of how SCO was being run. It appears they've struck a deal. 'The SCO Group, Inc. today announced it has entered into an agreement with BayStar Capital II LP to repurchase and retire all 40,000 shares of Series A-1 Convertible Preferred Stock currently held by BayStar.'" Summary: Baystar and the Royal Bank of Canada invested $50 million in SCO in October 2003. In 6 1/2 months, they've now converted their investment to $13 million in cash and $13.7 million of common stock, for a loss of almost half their investment.
When an investor such as Baystar does one of these convertible preferred deals, they can do something called "shorting against the convert".
... I can't be arsed to hit Yahoo Finance right now). Well, Baystar can sell shares at $15. They can sell shares that they don't even own ... that is called "short selling", and is a normal transaction on the stock market.
... if you've got a convertible ... you just pull out the convertible preferred shares and convert them, in order to have shares.
Here's how it works. At the time Baystar bought their convertible preferred shares, SCOX was trading at about $15 (roughly
You start with 0 shares, you sell (say) 10,000 shares at $15, now you have $150,000 cash and a position of -10,000 shares SCOX. (That's right, negative numbers!) Later, you buy those 10,000 shares back at $5 per share, leaving you with $100,000 profit and 0 shares of SCOX.
What if you short at $15 and the stock goes to $25? Then you lose $10 per share on every share that you shorted. Except
I'm not saying Baystar did this, but it's a common strategy for holders of convertibles. A convertible is really just a bond + a call option, and shorting against a call option is a common strategy.
In other words, you guys are laughing that Baystar is stuck with a bunch of $5 SCOX shares, but Baystar may have already sold them a few months ago at $15 or $20. They'll just use these conversion shares to deliver back on the shares that they borrowed+sold at $15 to $20.
That's precisely what they are doing here. Getting back what cash they can, getting a bunch of shares they can slow-dump back to the market, and not fighting a big, messy legal battle to get their 50 million back. Of course, SCO doesn't have 50 million in cash to give them and it would effectively shut SCO down, or force other fairly dire measures on them to get together 50 million bucks and still have operating capital - while Baystar itself may not give a crap, it would look quite bad for them to screw over a company they had invested in that badly.
So I guess we are left to wonder why Baystar bought into this deal in the first place. I have no idea, and I know there are lots of sinister motives assigned to this, but I'm sure some of the characters involved just got suckered into what sounded to them like a sure-fire legal get-rich-quick scheme - which is all that SCO's business is at this point.
80 days in fact, today's volume was 262,879,
and 10% of that is only 26,000 shares.
They have 2,105,263 shares to dump!
Well, when this was first announced, SCOX was trading at about $1. So when would you have shorted? $2, $5, $10? If you shorted $10,000 at $5/share, by the time it hit $20, you'd have to deposit an additional $30,000 to cover the difference in what you owe, otherwise you would need to sell.
So ya, if you shorted at $20 you would have made a killing (almost double your investment). If you shorted at $5, you would probably have been forced to cover, losing double, triple or quarduple your initial investment. So it never would have been that easy.
Also read about stop -loss orders on how you can limit your losses.
"There is no such thing as a sure thing" is also a cool paradox. (-:
I did....
Well, I tried, anyways.
I spent nearly 4-5 days, every twenty minutes or so, trying to short SCOX. At $20, $22, even $18.
Go look at my post history, I talk about it at the time SCOX was up there.
I would have shorted 5,000, even 10,000 shares.
I don't know exactly why, but there wasn't enough of a 'float' on SCOX for the mainstream brokerages to allow individuals to 'short' it.
I was pissed off. I've spent the last few months bitching about it to my co-workers.
In 'short' (no-pun intended), you didn't miss out on anything. It simply wasn't possible to begin with.
I tried, and got nothing. Oh well *sigh*
WhiteWolf666 an exBush supporter. All you new-school,compassionate,save the children Republicans can rot in hell
You can buy an option to insure that a short doesn't eat your lunch. I would have shorted the stock, but the options were sold out.
No offense but I doubt that is the reason. There are no options publicly traded on SCOX. Wish that there were, I could have made a killing.
Generally, you aren't making the same kind of bet that 85% of everything you put money into will flop in private equity, and you don't get the kinds of massive multipliers on success that you get with early stage VC (where a 10 million dollar investment might turn into 200-500 million dollars worth of equity after IPO or a big acquisition deal for the real "blockbuster" companies).
I'd guess that a 2x-4x multiple on their successful investments would be considered quite good (remember, these are mostly already publically traded companies). So actually taking a 50% hit on an investment would not be great for these guys, but it's still par for the course. Some people here are speculating they were partially hedged, though I'm not sure it would be possible to effectively hedge such a massive position in a stock that was difficult to short in the open market, though I guess they could have written their own options.
According to their own site, they've invested $745 million as a fund, which means 50 million was about 8% of their entire fund. So losing half of it, while not devastating, is definitely not a trivial amount even for a fund like this.