From: pejasani@SDRC.COM (the H-man)
Newsgroups: misc.invest
Subject: Re: Question on Selling Short
Date: 17 Aug 92 23:46:28 GMT
Reply-To: hitesh.jasani@sdrc.com
Organization: SDRC - Structural Dynamics Research Corp



In article <1426500243@igc.apc.org>, mcaldon@igc.apc.org (McAldon International
Inc.) writes:

|>
|>|It's my understanding that the stock price and book value of companies forced
|>|into liquidation by their creditors goes to zero.  The book value of the stock
|>(the equity in the company) goes to zero because the company has a negative net
|>|worth - why else would the creditors force a liquidation.  At this point the
|>|stock price goes to zero, since the book value of the stock is zero and there
|>|is no possibility of future appreciation - the company will cease to exist.
|>|
|>|In this situation, according to an old finance prof, the liquidation causes a
|>|closing of your position without you having to purchase any stock.  You keep
|>|the money received when you sold short minus the finance charges your broker
|>xtorted for the loan and walk away well off.  Kind of like hitting the lottery.
|>|  Hitesh J. Jasani             |  "Beware of the man who works hard to      |
|>
|>I'm not so sure about this.  What would happen if somebody took over this
|>"shell,' soaked up all the stock, then put the squeeze on the unsuspecting

The situation I was referring to was one in which the company was totally
liquidated (ie there is nothing left, but some stockholders holding worthless
stock and an entry in the books of whichever state this company is incorporated
under).  If this shell corporation existed in the state of Ohio, someone would
need to cough up ~$50 year (circa 1984) in franchise fees in order to keep this
"shell" alive.  This is whether the "shell" does business or not.

Who is going to cough up this money?  If the appropriate fees are not paid,
then the state wipes the corporation from their books and it ceases to exist. 
If the old stockholders put any more money into the corporation (either as debt
or equity) the old creditors will start circling like vultures trying to recoup
some more of their money.  Remember, this scenario involved a corporation with
negative book value to be forced into liquidation by its creditors.  So if the
creditors want to, they can ensure that a company dies, irregardless of who
owns the stock.

|>shorts.  I know of a company that went broke when Castro expropriated all
|>its holdings, which were concentrated in Cuba; today that company is listed

From the sparse information you've given me, I would say that this is a totally
different situation.  I don't see any mention of debt, let alone creditors
circling ready to liquidate the company.  Instead what you describe here is a
situation where assets are being stripped involuntarily from a company.  I
think - accountants help me with this one - the company can write off its
losses from the nationalization.  So the bottom line of the company is awash in
a sea of red simply due to bookkeeping entries, so what.  If the asset(s) were
its sole source of revenue, then the company no longer has the means to support
itself.  This is an ideal situation for a comglomerate (ala Exxon, Philip
Morris, etc.) with huge cash flow to come in and cheaply acquire a sweet tax
writeoff.

|>under another name on the Amex.  Ask your "old finance professor." DMcKenzie

I was unable to reach my "old finance prof," so I had to rely upon my senile
aunt Ethel.  Funny, she agreed with me one hundred percent. 8-) 8-) 8-)

|>
|>                         |        Vote for the environment          |
|>|    mcaldon@igc.org     |            Vote for AL GORE              |
|>|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|>              

Just my $0.0205 worth.  Inflation is causing everything to go up. 8-)
--

 +-------------------------------+--------------------------------------------+
 |                               |                                            |
 |  Hitesh J. Jasani             |  "Beware of the man who works hard to      |
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 |  pehjj@Sdrc.Com               |  the hard way"                             |
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