There are enoughabsurdities on the surface of Carl Icahn’s pseudo-proposal for Dell that you don’t need to think deeply to find more but I guess you could. One thing that might bother you if you let it is the old slicing-the-pie-to-make-more-pie thing. Why should funding Dell with more debt and less equity, and running it with less cash, make it more valuable? Icahn’s plan involves paying shareholders $16 billion in cash in exchange for reducing Dell’s net asset value by $16 billion; the total value of what the shareholders own (Dell shares -> cash + shares) should really stay the same.
This is an argument against all corporate finance structuring and nobody really believes it, though some people come close. Obviously you can make a company more valuable by financial engineering!1 There’s some debate, though, over which sorts of engineering actually work. LBOs? Definitely. (I mean, probably.) Levered recaps? Sometimes, sure. Preferred-stock-funded recaps? Umm. Maybe!
Just some random warrants? No come on that’s nuts.
Derivatives are confusing, even pretty simple ones, which is why Goldman Sachs can describe Warren Buffett’s sale of $5 billion of GS stock like this:
The Goldman Sachs Group, Inc. today announced that it has amended its warrant agreement with Berkshire Hathaway Inc., and certain of its subsidiaries (collectively, Berkshire Hathaway) from cash settlement1 to net share settlement.
“We intend to hold a significant investment in Goldman Sachs, a firm that I did my first transaction with more than 50 years ago,” said Warren Buffett, Chairman and Chief Executive Officer of Berkshire Hathaway. “I have been privileged to have known and admired Goldman’s executive leadership team since my first meeting with Sidney Weinberg in 1940.”
“We are pleased that Berkshire Hathaway intends to remain a long-term investor in Goldman Sachs,” said Lloyd C. Blankfein, Chairman and Chief Executive Officer of Goldman Sachs.
In September 2008, Buffett bought – among other things – warrants to buy 43.5mm shares of Goldman Sachs stock in October 2013 for $115 a share, for a total purchase price of $5 billion. Today he amended that to instead allow him to buy in October 2013, for a total purchase price of zero, a number of Goldman Sachs shares equal to (A) 43.5 million times (B) [the average trading price of those shares at the end of September 2013 minus $115] divided by (C) that average trading price. As of when I type this, at a price of $145.80, that works out to around 9.2 million shares. So one way to read today’s agreement is that in effect Buffett is selling back 34 million (give or take) shares to Goldman for $5 billion. Read more »
Is there a better word in the English language than “monetize”?1 When you have a thing, and you would rather have money than that thing, you have about two choices, which are:
sell the thing, or
monetize the thing.
Choice one is straightforward and boring; choice two has the advantage of a wholly indeterminate meaning, plus sometimes you get your money and get to keep the thing. Anyway what happened here?
Qatar has cashed in its remaining warrants in Britain’s Barclays Plc, a move that should yield a $280 million profit and still leaves the sovereign wealth fund as the bank’s top shareholder following a controversial fundraising in 2008.
Deutsche Bank AG and Goldman Sachs Group Inc said they would sell up to 303.3 million shares – worth 740 million pounds – to comply with Qatar’s request. They sold shares at 244 pence apiece, a 4 percent discount to Friday’s closing share price, but did not confirm whether all the shares had been sold.
Qatar Holding said in a separate statement late on Sunday it had monetized its remaining holding of 379 million units of Barclays warrants – instruments that convert into shares – without affecting its 6.65 percent stake.
The warrants have not yet been converted, but can do so at 198 pence per share in the next year, which would reap a 180 million pound profit at current prices.