My friend and co-host David Faber concluded yesterday's show by asking me, with tongue firmly planted in cheek, "What did I learn today?"
After pondering our discussion about Discovery Communications, I gave what I considered to be a straightforward answer; "I don't know!"
Thankfully, my friend, Steve Eick, who ran Avery Partners for years, does.
A little back story here. My confusion centered on the discrepancy in value between voting and non-voting shares for a number of media companies, but more specifically Viacom and Discovery.
In theory, each share should be just as valuable, but they are not: in the case of Discovery, the A-class shares trade at a significant premium to the non-voting shares. So naturally, I wondered, 'Why does this spread exist, and how can I profit from it?'
First, it is important to understand why voting shares exist at all. The reason's actually quite simple: Separate share classes preserve voting control for families or other controlling parties.
The perceived extra value of the so-called voting-stock causes investors to bid those shares up, and as a result, they tend to trade at a premium to the shares that don't confer voting rights, even though in theory, they should be just as valuable.
Guys like Steve Eick love these situations. Through the financial alchemy of risk arbitrage, Steve is hoping to profit off this pricing discrepancy by shorting one entity and buying the other. Seems simple enough, but it still sounds dangerous to me.
My "Call-to-Action" is to stay away from these types of opportunities. While it's a fascinating topic, this is purely big-swim territory.
There is always the danger one class of shares could get acquired, which would throw the relationship out of whack. There are also liquidity issues as well. But biggest reason for me is the notion that if something seems too good to be true, it probably is.
So, thanks for the explanation, Steve. Now you, along with me, can tell David Faber what we have learned!
Programming note: "
Gary Kaminsky does not hold any equity positions.
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