Money Mavericks: Confessions of a Hedge Fund Manager (Financial Times Series) by Kroijer Lars

Author:Kroijer, Lars [Kroijer, Lars]
Language: eng
Format: epub, mobi
ISBN: 9780273772545
Publisher: Pearson Education Limited
Published: 2012-09-06T21:00:00+00:00

Corporate finance summary

For those with an interest in corporate finance, here is a brief explanation of why Bure’s actions were likely to enhance shareholder value and why we could profit from them.

Soon after the shares, warrants and bonds were issued it was obvious that there was a lot for us to do. The bonds traded at a very high yield to maturity, and the warrants traded below their intrinsic value (i.e., you could buy a warrant, exercise it, and pay less than the share price – this should not theoretically happen, but the exercise process took about two or three weeks).

We thought it was the warrants that provided the best opportunity for management to create value. Imagine the scenario where a company has an equity value of 100 (divided over 100 shares each worth 1.00), but a NAV (net asset value) of 150. The company would trade at a 33 per cent discount to NAV. Suppose now the company sold 25 worth of assets and used the proceeds to buy back its shares at 1.00 per share. Pro forma for this the company would have a NAV of 125 and a new equity value of 75. Unless the shares traded up in price the discount would have gone from 33 per cent to 40 per cent (50/125). To maintain the discount of 33 per cent to NAV the share price would have to increase to 1.11.

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