Excellent question. Here are only a few possible answers, there are more that are beyond the scope of what we are capable of, that will apply to larger institutions. The main answer for smaller to medium size investors, is liquidity. The warrants lack liquidity. If I can sell the warrants outright at their inherent value or get any premium on time, I would always choose that option, for convenience alone. But average investors have no experience with warrants. If the stock goes to $3, your average joe will buy the stock for 3, as opposed to the possibility of losing all money by buying a warrant for 1.50+ at that point. People with no real confidence in this company that just want to day trade, will avoid these like the plague. When they are in the money, I personally don't see them as any riskier than the common... because I strongly believe in these guys. Others who aren't in this for the long haul will only see expiration risk and long term worst case scenarios. People are simply too impatient and risk averse for this type of instrument. So I don't honestly know if premiums will ever be consistently paid for them. Worst case scenario for people entering the stock at that point is the stock going to $2 or less again, and being saddled with a time constraint to make something happen and unload them in such an illiquid scenario. The prices just trade too close together because of the exercise price, making them just a pseudo proxy of the common stock, that trades incredibly thinly.
So here is a scenario I will personally face if the stock does ok. Stock goes to $3 on good news, I own way too many warrants to ever expect to sell them outright and consistently get what I would actually make by exercising them and selling at market. If this isn't the next blockbuster, can I really expect to be able to find the warrant trading volume to unload 100K+ of them... especially in a hurry if we really move and I fear a correction. So I will personally implement a hybrid approach... others will exercise and sell the common on good days when prices are good. I will hold some with the hope of being able to sell at premium. I won't be able to day trade them though in conjunction with the actual stock movement. Say we get good side news or it's a great day in the market and our stock swings up 20 cents, I won't be able to expect to make 20 cents outright by selling the warrant on that day, as buyers of warrants don't usually chase 1:1 (even though the inherent value is appreciating 1:1) on those kinds of movement. I will absolutely need to exercise a fair amount of my warrants, so that I am able to capitalize on swing trading. Second thought, if I am holding a couple hundred thousand warrants, I'm just not going to be able to sell that many because of liquidity, unless this gets tons of attention and people are clawing for anything they can get. If I even want to sell that many warrants if maybe we appreciate in value, my only option to sell any bigger blocks of them is to exercise them, and then sell the common, which still isn't the most liquid stock to begin with. It's the only option if you own a lot. And I will absolutely exercise a portion early. Once we start to move, I will sell some warrants outright, to raise the capital needed to exercise some, and will pay to exercise early rather than later, so that if the stock starts to move and I want to exit a portion of my position, I wont be held captive waiting to receive the shares I exercise
. Hope that makes sense.
Here's the second point. Most people holding these warrants aren't average investors. They are big guys. They got in early and put down significant capital. Some of those companies will have other motivations to exercise. I have no idea who owns them. They aren't bound by the rules of filing for % ownership. If it's a company like ligand, and Viking strategically needs capital, or they have strategic interests to garner a certain percentage of the common, increase voting rights etc, make a public statement by increasing their stake of the common that could positively impact share price, etc etc, market manipulation and power play type stuff, they will end up exercising. That's why nobody is selling the warrants and they aren't being Day traded like common shares, it's the only way that institutions can retain an ability to silently guarantee the ability to enter in bigger percentages. If they are owned by companies that have strategic interests in Viking and the company is hurting for cash, it could also be a win win for their company and Viking to exercise them and generate the capital for the company as well if they are short on cash and dilution is a short term concern.
Short answer, if you're buying 40,000 warrants or less, you won't need to know any of this, and just don't worry about it. Also... there are somewhere around 8-10 million warrants. And they aren't very liquid. So once they start being exercised, these are going to get pretty rare. No matter what happens, I will be holding at least 25% of what I have until late late in the game, as they will be hard to find, and I will be more likely to be able to name my price. Kind of like my own little marketplace. I really like the warrants, because the crowd that owns them are disciplined, at least up to this point. They don't panic sell in general. Nobody is undercutting anyone else. They are being sold meticulously and rarely, without compromising the price. I don't think they are as prone to being manipulated in an unfavorable way, at least for now.
I think about this junk all the time, so maybe some of it I haven't said clearly. Feel free to ask follow up if I am screwing up getting this across in a clear fashion!
