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Marconi


Norv
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Hi could anyone explain as I have no idea and I don’t always watch the markets, why some time back I purchased some Marconi shares when they were real low and thought I would make something out of them if they ever went up.

Well some time later I look at my portfolio to find that I now have WARRENTS no shares.

I ask for an explanation and apparently they were consolidated or something and all shareholders were given x amount for the shares they originally had.

This was the same with Baltimore Technologies why and how does this happen.

What is the point of buying shares when they are low only to have them changed to warrants that are worth nothing yet Marconi shares are still going.

If anyone can explain this I would be very happy, as I have lost loads of cash with this.

Norvin

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Marconit did what they did as otherwise the company goes into Liquidation.

Most companies are in debt (e.g. they need the cash to expand and then slowly pay it back)

A company has a value e.g. if it makes big profits it's high.

So imagine Marconi being worth 2 billion. (500 million in assets & 1 billion for the brand/profit's it generates)

On the otherside it owes the bank and other investors (bond holders) 1.5 Billion.

Shareholder make up the other 500 million.

So theroetically if someone wanted to buy Marconi they would have to pay the shareholders 500 million between them.

This is fine until Marconi gets into trouble, e.g. they don't earn anough to pay back the debt and nobody is willing to lend them any more money (A rescue package = somebody was prepared to lend the cash). If someone had offered to lend Rover 1 billion they would still be in business.

so the situation becomes

1) They can't pay the interest on the debt (coupon for bonds) and suppliers get worried they might not get paid.

2) Suppliers start demanding payment/cash up front so more cash flow problems.

3) There share price drops as there value as a business is falling

4) At this point you bought... not the wisest move.

Now we have a situation where Marconi is worth 1 billion and owe 1.5 billion. But if the bank/bond holders demand the money then they'll find Marconi is only worth about 250 million. e.g. it's worth more as a going concern.

Also remember share holders take the most risk and are paid last. So even if it was sold off and worth 1 billion the share holders wouldn't get a penny of it.

So a deal is struck. The debt/bond holder's take control of the company in exchange for writing off the debt.

So they give existing shareholder's (such as yourself) 1 share for every 100 or 1000 you own. the rest go to the debt/bond holders.

The result is:

Marconi is worth 1 billion

Debt = 0

So there's back in business and lower profits are ok as there debt levels are much reduced. Also a lot of jobs are saved. Even the share holders manage to get something even if it's a hundreth of there original investment.

I hope this explain what happened and why.

For another example of this:

Telewest did this they went from a share price peaking around £5 to a value of 1p then did this trick and managed to keep a float.

And finally a potential:

Euro tunnel has massive debts and not enough profit to pay them off. Expect this trick ot happen to them in the next few years.

A good rule of thumb is never ever buy a share that's lost > 40% of it's value.

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Marconit did what they did as otherwise the company goes into Liquidation.

Most companies are in debt (e.g. they need the cash to expand and then slowly pay it back)

A company has a value e.g. if it makes big profits it's high.

So imagine Marconi being worth 2 billion. (500 million in assets & 1 billion for the brand/profit's it generates)

On the otherside it owes the bank and other investors (bond holders) 1.5 Billion.

Shareholder make up the other 500 million.

So theroetically if someone wanted to buy Marconi they would have to pay the shareholders 500 million between them.

This is fine until Marconi gets into trouble, e.g. they don't earn anough to pay back the debt and nobody is willing to lend them any more money (A rescue package = somebody was prepared to lend the cash). If someone had offered to lend Rover 1 billion they would still be in business.

so the situation becomes

1) They can't pay the interest on the debt (coupon for bonds) and suppliers get worried they might not get paid.

2) Suppliers start demanding payment/cash up front so more cash flow problems.

3) There share price drops as there value as a business is falling

4) At this point you bought... not the wisest move.

Now we have a situation where Marconi is worth 1 billion and owe 1.5 billion. But if the bank/bond holders demand the money then they'll find Marconi is only worth about 250 million. e.g. it's worth more as a going concern.

Also remember share holders take the most risk and are paid last. So even if it was sold off and worth 1 billion the share holders wouldn't get a penny of it.

So a deal is struck. The debt/bond holder's take control of the company in exchange for writing off the debt.

So they give existing shareholder's (such as yourself) 1 share for every 100 or 1000 you own. the rest go to the debt/bond holders.

The result is:

Marconi is worth 1 billion

Debt = 0

So there's back in business and lower profits are ok as there debt levels are much reduced. Also a lot of jobs are saved. Even the share holders manage to get something even if it's a hundreth of there original investment.

I hope this explain what happened and why.

For another example of this:

Telewest did this they went from a share price peaking around £5 to a value of 1p then did this trick and managed to keep a float.

And finally a potential:

Euro tunnel has massive debts and not enough profit to pay them off. Expect this trick ot happen to them in the next few years.

A good rule of thumb is never ever buy a share that's lost > 40% of it's value.

Cheers Andrew explained beautifully, and thanks for the tip

Norvin

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Cheers Andrew, that's a very useful post for me too. Debt for equity swaps almost always destroys all value for shareholders. The two most prominent cases lately being MyTravel and Jarvis. I lost quite a lot of money on Jarvis earlier this year, but it also taught me a good lesson to steer clear of bad companies. My rule of thumb: if there's ever a sniff of D4E, run for the hills and don't look back. The risk/reward just isn't worth it.

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