Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice

P1: TIX/XYZ P2: ABC

JWBT436-c23 JWBT436-Baker March 4, 2011 7:57 Printer Name: Hamilton

406 Special Topics

Exhibit 23.2 An Example of a Structure PIPE Deal

Initial Investment –$1,000,000.00

Proceeds from short sales 1,117,646.50

Proceeds from sales of PIPE shares 1,215,683.00

Cost to cover short position –823,529.00

Profit $509,800.50

90-day return 50.98%

Annualized return 203.92%

Note: This exhibit illustrates a structured PIPE deal for the sale of a $1 million

convertible note to a hedge fund resulting in a profit.

an unrealistic assumption. However, even if the fund covers its short position at

$7 per share and sells its PIPE shares at $6.50 per share, it would still make

$58,823.50 on the deal, yielding a 90-day return of 5.88 percent and an annual-

ized return of 23.53 percent.

The strategy can be even more profitable for hedge funds in a structured PIPE

deal with a floating conversion price. If the issuer’s stock price drops, a fund profits

on its short sales dollar for dollar. At the same time, it also profits on the PIPE shares

because the conversion price of the PIPE securities is based on a discount to market

price on the date of conversion; that is, the conversion price floats down with the

market price. Hence, the fund makes money on both sides of the trade, subject

only to unwinding risk.

For example, assume that an issuer negotiates a structured PIPE deal for the

sale of a $1 million convertible ...