From: ask@cbnews.cb.att.com (Arthur S. Kamlet)
Subject: Re: Warrants vs. Call Options
Organization: AT&T Bell Laboratories,  Columbus, Ohio
Distribution: usa
Date: Wed, 19 Aug 1992 19:04:21 GMT

In article <2292@gandalf.intel.com> chedley@carthago.intel.com (CHEDLEY_AOURIRI) writes:
>In article <1992Aug18.225928.1240@leland.Stanford.EDU>, tjm@leland.Stanford.EDU (Timothy Minvielle) writes:
>|> I apologize if this is a FAQ, but could someone please explain to me the difference between a warrant and a call option.  They both seem to give the holder the right to purchase stock at a future date at a pre-determined price.
>|> 
>Right!
>Except that warrants are issued and sold by the company, while 
>options are written and traded by investors or gamblers. 

You imply there is a difference :^)

Often, the warrant will be part of another offering by the company.
The company may have issued "units" of "stuff" - for example, one
unit may entitle holders of the unit to 1 warrant, 2 conv. preferred
shares, and 5 rights to purchase common at a specified price.  This
could be issued as an IPO or could be part of a merger agreement.


There may be a date, before which, the components of the units trade
as units, and after which each component trades separately.  The
company will apply to various exchanges to have the units and its
components traded there.

Warrants usually have a much longer life span than options.

They pay people big bucks to think of these schemes.


Options are created by people out to make money by creating a
demand for their product, the option.

>And that have some implications:
>
>-- When you exercise a warrant and buy the stock, the company issues new
>   stock shares. This tends to dilute the stock price of the company as
>   more shares are floating around the market.


Depends.

In general, it is not correct to say that more shares of a stock
dilutes the price of the stock or its worth.  What it dilutes is
the effective voting power. But if we are talking a hundred shares
out of a few million, dilution of voting power is not material.

Dilution of the value of the shares depends on whether or not the
stock is trading above or below shareholder's equity or Book Value.

Example:   Shareholder's equity is $10 per share.  Share is trading
at $9.  If a warrant is exercised at $8, then you certainly dilute
shareholders equity/share value.

But if Shareholder's equity is $10 and stock is trading at $14 and
you can exercise the warrant at $12, what happens?

Why, for every share you buy, formerly having equity of $10, you
pump into the company treasury $12.  This has anti-dilutive
properties; that is, it causes the per share book value of every
share in the company to rise!

Even other shareholders who just today bought the shares at $14
market price will see equity for their shares rise so they will be
happy to see the warrant holders exercise their warrants.


>-- When you exercise the warrant, the company gets the cash price of the
>   shares. This tends to make its financial balance sheet better, which
>   in turn tends to increase its stock price.

Not always.   If Book value= $10 and market price is $8 and you can
              exercise at $6, then you will dilute the shareholders
equity, but will own shares trading above your exercise price. This
is good for you but bad for the balance sheet as it dilutes book
value.

>Options do not have any material effect on the value of a company.

True. 

Unless some crooks try to manipulate the stock price to make money
on the options.
-- 
Art Kamlet  a_s_kamlet@att.com  AT&T Bell Laboratories, Columbus
Newsgroups: misc.invest