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CHICLETS – 1906

Picking up from yesterday, it seems that people have long thought – or at least advertised – that gum chewing could sharpen the mind.

And now . . .

MIND-READING THE TAPE

‘I’m napping, don’t bother me,’ I said, when the servant appeared at my door. (I don’t have a servant, but it makes for a better story.)

‘I think you’ll want to see this, Mister Andy,’ he said, holding out a MacBook Pro with 2.4GHz Intel Core 2 Duo. (I don’t have one of those either, but I know it gets some of you excited.)

‘Oh, sure. You’re a Mac and I’m a PC. I am napping, Babu. Go!’ (I mean by my choice of imaginary servant name no disrespect to the people of the Subcontinent. I am just thinking of that Seinfeld episode, and it seems to me impossible not to like a character named Babu.)

‘No, Doofus, not the computer – what’s on the screen. HAPN just traded 3.9 million shares at $5.97.’

I leapt out of bed and across the room in a single motion, reminiscent of the move by which the prince (was it a prince?) leapt to the top of the stairs in a single bound in the third scene of Lettice and Lovage. Grabbing the sides of the PowerBook with both hands to steady myself, I gazed into its beautiful 17-inch screen and saw that (as always) Babu had spoken the truth. HAPN had traded 3,896,874 shares in the final minutes of the day at $5.97 a share. One of the blocks was 3 million shares. Another was half a million. Another, a quarter million.

Were the buyers rushing to buy, thinking the InfuSystem acquisition would be defeated? Were they paying $5.97 in hope of getting barely that back when the trust fund was liquidated several months from now?

It seems more likely that they had bought the shares thinking and hoping the deal would be approved, and that the stock might two or three years from now be $8 or $10 or – leaping to the top of the stairs in a single bound – $12.

Furthermore, it seems likely to me that these weren’t just random sales to an eager buyer, but, rather, arranged sales between an eager (or at least willing) buyer and ‘holders of record August 6’ who had been planning to vote against the acquisition. And who were told, ‘Look: you can kill the deal and get about $5.97 a few months from now, or you can give us your proxy and we’ll get you your $5.97 now.’

I have no firsthand knowledge of any of this, but it just stands to reason.

So while something disastrous could still happen, it now seems pretty likely (at least to me) that the deal will go through Friday, at which point, in short order, our warrants to buy the stock at $5 become exercisable.

And then a whole new guessing game would begin. Namely: Sell? Hold? What will the stock do? What will the warrants do? And – most essentially, of course – how will the underlying business, InfuSystem, do?

If the stock stayed at $5.97 after the deal went through – if it does go through – the theoretical value of the warrants would then be something like $1.70 (click and play around with your own assumptions). Except that the standard options-pricing models do not account for one key feature of the HAPN warrants – namely, the cap on their upside. (If the stock hits and stays above $8.50, the company can, and likely would, force their conversion, so that you’d get just a bit more than $3.50 each.) Nor does the model account for their being so many warrants.

My best guess is that the warrants will sell, at first, only a little above their intrinsic value – not least because there will be 33 million of them out there . . . owned, in many cases, by people, perhaps even you, eager to take their profit. If the sellers are really eager, they’ll settle for no premium at all – exercising the warrants and then immediately selling the stock, which would push the stock price down. But that would offer another interesting opportunity.

Anyway, these will be very happy bridges to cross if and when we come to them. Back to the nap.

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