A software business owner by day, a value investor by night. I seek deep value in longs and offset them with shorts of high priced stocks. The Value Guy http://seekingalpha.com http://seekingalpha.com/instablog/833749-the-value-guy/132485-cliffs-notes-why-salesforce-com-s-share-price-may-go-off-a-cliff-due-to-convertible-notes?source=feed 132485
Well, with CRM's amazing upward rise over the last fiscal quarter (the current fiscal quarter ends Jan 31st, 2011), the notes will become eligible for conversion when this quarter ends as the trigger condition for conversion has been met. That means we can expect an additional 6.7 million shares to be in new hands sometime very soon. For those of you who have dug into the 10K and 10Q, yes, CRM did purchase Note Hedges that enable CRM to buy in 6.7 million shares at $85 to counteract the dilution, yet they also sold 6.7 million warrants with a strike price of $119 per share. As long as the share price is above $119 these warrants are in the money and will be exercised, if they have not already been exercised in part or in whole when the stock price was higher, i.e.,  in the $130s and $140s. 

Any which way, we are looking at 6.7 million shares in new hands at some point in the next few months. At current price levels it is doubtful that the institutions that own 90% of CRM will purchase more shares, especially given the recent breakdown in CRM's momentum. These shares are in addition to the options for 4 million shares given to CRM employees that vested and exercisable at the end of October. Any employee at CRM who followed management's lead would have exercised and sold the shares at the recent record highs - the CEO Marc Benioff set an example by selling 10,000 shares a day throughout 2010. Going with a conservative estimate that over the next few months we will see an additional 8 million shares in new hands, we are looking at dilution in the area of 6%, given that at the end of October 131 million shares were outstanding on a non-diluted basis. This will be significant for the EPS. 

Questions that remain to be seen as to how they will be resolved:
1) Accounting treatment of the debt discount for the convertible notes - if my reading is correct, then the $108M of debt discount that was being amortized to interest expense over the life of the notes will have to be taken all in either this or the next quarter as the convertible notes will be converted. This may cause a headline loss for CRM and wipe out most if not all earnings for the year. 

2) The Note Hedges - not much is written on the exact mechanism of this in the 10K, yet if these work like a call option on 6.7 million shares at the $85 strike price as it appears from the 10K, then to exercise the option would cost CRM $570 million in cash. The benefit of doing so from CRM's point of view would be to offset the dilution from the convertible notes. On the other hand this would be a major cash drain, on top of over $700 million that CRM has spent over the last 6 months on various acquisitions - the $278 million for land in San Francisco, $210M for Heroku, $151M for the 26% of CRM Japan that Salesforce.com did not already own, $142M for Jigsaw and $30M for Dimdim.   

All of the above could be the catalyst that will return the 200+ P/E of CRM back down to a sub-100 P/E.


DISCLOSURE: Short CRM  

Disclosure: I am short CRM.
]]> Mon, 24 Jan 2011 22:20:00 -0500
Well, with CRM's amazing upward rise over the last fiscal quarter (the current fiscal quarter ends Jan 31st, 2011), the notes will become eligible for conversion when this quarter ends as the trigger condition for conversion has been met. That means we can expect an additional 6.7 million shares to be in new hands sometime very soon. For those of you who have dug into the 10K and 10Q, yes, CRM did purchase Note Hedges that enable CRM to buy in 6.7 million shares at $85 to counteract the dilution, yet they also sold 6.7 million warrants with a strike price of $119 per share. As long as the share price is above $119 these warrants are in the money and will be exercised, if they have not already been exercised in part or in whole when the stock price was higher, i.e.,  in the $130s and $140s. 

Any which way, we are looking at 6.7 million shares in new hands at some point in the next few months. At current price levels it is doubtful that the institutions that own 90% of CRM will purchase more shares, especially given the recent breakdown in CRM's momentum. These shares are in addition to the options for 4 million shares given to CRM employees that vested and exercisable at the end of October. Any employee at CRM who followed management's lead would have exercised and sold the shares at the recent record highs - the CEO Marc Benioff set an example by selling 10,000 shares a day throughout 2010. Going with a conservative estimate that over the next few months we will see an additional 8 million shares in new hands, we are looking at dilution in the area of 6%, given that at the end of October 131 million shares were outstanding on a non-diluted basis. This will be significant for the EPS. 

Questions that remain to be seen as to how they will be resolved:
1) Accounting treatment of the debt discount for the convertible notes - if my reading is correct, then the $108M of debt discount that was being amortized to interest expense over the life of the notes will have to be taken all in either this or the next quarter as the convertible notes will be converted. This may cause a headline loss for CRM and wipe out most if not all earnings for the year. 

2) The Note Hedges - not much is written on the exact mechanism of this in the 10K, yet if these work like a call option on 6.7 million shares at the $85 strike price as it appears from the 10K, then to exercise the option would cost CRM $570 million in cash. The benefit of doing so from CRM's point of view would be to offset the dilution from the convertible notes. On the other hand this would be a major cash drain, on top of over $700 million that CRM has spent over the last 6 months on various acquisitions - the $278 million for land in San Francisco, $210M for Heroku, $151M for the 26% of CRM Japan that Salesforce.com did not already own, $142M for Jigsaw and $30M for Dimdim.   

All of the above could be the catalyst that will return the 200+ P/E of CRM back down to a sub-100 P/E.


DISCLOSURE: Short CRM  

Disclosure: I am short CRM.
]]> crm CRM Short