But why bother with this collar? Who is it supposed to be protecting, or what is the logic behind the scheme? it kind of sounds like one of those derivatives.... you know, the weapons of financial mass destruction
Thread: The Collar  |
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Started 1 month, 1 week ago by BeautifulPlumage
From the BNI FAQ about the proposed deal: BNSF shareholders will receive a fixed dollar amount ($100) of Berkshire Hathaway shares for each existing BNI share for which they elect to receive stock consideration, as long as Berkshire Hathaway's Class A stock trades between approximately $80,000 and $125,000 over a defined period prior to the closing. The exchange ratio is fixed at the ...
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mungofitch replied 1 month, 1 week ago
But why bother with this collar? Who is it supposed to be protecting, or what is the logic behind the scheme? My assumption is that it went like this. It was negotiated as a cash price, a nice round $100/share, with an even nicer and rounder share ratio of 1/1000. BNI insisted on some shares, so some shareholders could get a tax free transaction. The conversion was OK'd, but to be ...
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BeautifulPlumage replied 1 month, 1 week ago
Jim, Your explanation makes sense to me. 60% of the deal is cash, so that part is straightforward: $100 per BNI share. As for the 40% stock part, since the deal is expected to close in the 1st Q of 2010 (dixit BNI FAQ), the width of the collar makes it overwhelmingly likely that, for every share of BNI traded for BRK shares, BNI shareholders will get exactly the same amount, $100 ...
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mungofitch replied 1 month, 1 week ago
Side note: I sold 20% of my BRK shares today, and bought the equivalent amount back in BNI shares. I had been looking to reduce my share holdings, and you can't buy a $100 put that's cheaper than -$3... (current BNI price $97) Hmmm, I'm not sure that's so good a deal. If BRK drops, you get more BRK shares, true. But you forego all upside that BRK experiences between now and closing ...
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BeautifulPlumage replied 1 month, 1 week ago
Yeah, sure, I lose the upside, but that's what happens when you sell shares. In my case, I have hung on to about $3 upside, up to $125k. On the other hand, so much less downside! (0) I still have about 40% of my holdings in BRK, so some hefty upwards price movement would still be welcome... bp
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OPA11111 replied 1 month, 1 week ago
BP Did you just incure two taxation events? One on your BRK sale and one on the $100 BNI purchase?
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BeautifulPlumage replied 1 month, 1 week ago
Did you just incure two taxation events? One on your BRK sale and one on the $100 BNI purchase? No. One taxation event is the sale of BRK, but it is not a very big gain, just shares I bought around $3000, and I have offsetting losses. And there is of course no taxation on the BNI purchase; when the conversion happens in Q1, the 60% that will go to cash will be at around the same ...
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