Bill Ackman Wants to "Gift" You Warrants
Warrants Explained
The News
Bill Ackman, a renowned hedge fund manager, is making waves in the financial world with his latest move to resurrect the Initial Public Offering (IPO) of Pershing Square USA, or in other words, making his investment firm stock tradeable on the public market exchanges. Given that he had a difficult time generating investor demand previously, he is now using a financial instrument known as "warrants," to sweeten the deal for early investors. Under this storyline is an interesting and not-as-well-known financial instrument, creatively deployed by a billionaire hedge fund manager.
But first, who is Bill Ackman?
Bill Ackman is a prominent figure in the hedge fund industry, known for his role as the CEO and founder of Pershing Square Capital Management. With a career spanning over two decades, Ackman has built a reputation for making bold investment moves as an “activist” investor, which means he tries to gain influence to advocate for significant changes within the companies he invests in. By doing so he is “actively” guiding company decisions to increase shareholder value (a.k.a. the stock price).
The Concept
Investors participating in this new attempt at an IPO will receive both common shares (equity in the company) and warrants. Warrants are financial instruments that give the holder the right, but not the obligation, to purchase a company's stock at a specific price within a certain timeframe. Think of a warrant as a ticket that allows you to buy a concert seat at a set price, regardless of how much the ticket price might increase in the future. If the concert becomes highly popular and ticket prices soar, your warrant lets you buy the seat at the original lower price, providing potential profit. Upside without the downside.
You may be thinking that this sounds a lot like an option… and you would be correct. While warrants and stock options are very similar, there are a few differences.
(1) Ownership Issuance: Warrants are typically issued by the company itself, leading to the creation of new shares when exercised. Options are issued by traders themselves as contracts or in the case of employee options are already included in the company’s issued shares in an option pool.
(2) Public Trading: Options can be traded on the public exchanges whereas warrants can only be traded in private secondary transactions.
(3) Expiration Period: Warrants generally have longer expiration periods, sometimes years or even a decade or more. Stock options are typically short term in nature, measured in days or months.
(4) Purpose: Warrants are primarily used to attract investors and raise capital. Stock options are designed to incentivize and retain employees or, in public markets, provide an instrument for stock price speculation for traders.
The Example
Imagine you’re planning to buy a new smartphone. A store offers you a “rain check” that allows you to purchase the phone at today’s price even if the price increases next month. If the phone becomes more popular and the price rises, your rain check lets you buy it at the original lower price, saving you money. Similarly, a warrant lets you buy company shares at a fixed price in the future, potentially saving you money if the stock price increases. And, if you don’t pay for them, it seems like upside without the downside (although you can argue that the price is baked into the equity price, which makes it less of a “gift”).
If you are interested in learning more about this story, check out this article. And now that you know about Ackman, his IPO efforts and his use of warrants, I hope it’s more exciting to follow this story in the media to see what happens!
The Quiz
If your warrant is worth less than the strike price at its expiration date, do you have to buy the underlying stock? (scroll down for answer)
Answer: No. Warrants provide the right but not the obligation to buy.
good article. given the full article is behind a pay wall, might be helpful to add a few more paragraphs to explain warrants given your article is very, very high level.