I think the rapid change we have seen in the 4DS share price is the result of investors finaly realising that the 4DS strategical landscape has changed and that we are in a new situation.
This new landscape started to take shape after the 7.2 millions dollars shares placement and SPP of july 2020.
4DS took advantage of ASIC special COVID regulations to ask for an amount of money that was more than two times what they used to ask in previous CR.
Lots of shareholders (myself included) wronglyinterpreted this massive CR as a signal that the end game was postponed for 2 years, as 7.2 millions would pay for two years collaboration with Imec.
IMO, the true intention of the board was to gain some leverage, or some freedom of movement in the final stages of its relations with WDC.
Everything turns around the cash bonus, and possibly around pre acceptance arrangements (see Dentons takeover guide p 12).
The former situation : It isto HGST/WDC to say « when »
Before the 7,2 millions CR, the plan was clear : WDC/HGST will take over 4DS as soon as they see fit. Ie, as soon as the Mb chip will be ready for production in one of WDC/Kioxia fab.
HGST took control of the experimentation process at Imec and it was for them to decide the timing of the takeover. They could have said "Itwill come, don't worry,but we are notthere yet. We need to know the exact metrics to determine the right price".
WDC/HGST had some tactical levers it could pull to postpone the takeover. First, the 4DS board would ask for a cash bonus or a some other advantages like becoming member of the board of HGST. Those are common and legal practices.
Those kind of advantages given to certain members of the target company are only possible when the control of the target is sold by the mean of a "scheme of arrangement".If the company is sold through an "On market takeover" or an "Off market takeover", it is forbiden. The board must get exactly the same advantge as the average sharolder.
So the potential acceptance of an on/off market takeover by the 4DS board would come at a price for members of this board. They would have to give up any kind of special advantages they would have been entitled to in the case of a "scheme of arrangement".
The new situation : 4DSstarts to fly by its own
The Cash bonus
After the 7,2 millions CR, the situation changed.
The board could now pay a cash bonus with the 4DS money.
-Cash at the end of Q3 = 7,2 millions
-Cash at the end of Q4 2020 = 6 millions (They will spend arround 1.2 millions in Q4)
-Cash that will be paid for the remaining options = 4.489 millions (all options will vest on decision of the board if there is a liquidity event – AND – this amount will be considered as part of the cash bonus ifforgiveness is granted by the board).
-Total 4DS cash avaible for a cash bonus = 10.489millions (if the company is sold before End of Year)
-This 10.489 millions of potentiel bonus,means that 4DS could be sold for a minimum price of 209.786 millions AUD or 0,15 Per share fully dilluted (10.489 / 5%), through an "On market Takeover" or an "Off Market Takeover",without incuring a big loss for the management and notably the CEO. More importantly for the employees, the options would be free (no need to borrow money to pay for them).
The possibility of the board telling shareholders to accept an "Off Market Takeover" became plausible if the WDC was to postpone its offer again.
Possible Pre-Acceptancearrangements
The 7,2 millions CR changed something else.
IMO, the board gained some certainty about the minimum amount of cash they will received in case of a liquidity event. They where then in a position to make pre-acceptance arrangements.
One of the problem they faced before the CR, was that the board and staff accounted for less of 10% of voting shares of 4DS.
That means that they where unable to oppose even a mandatory selling in the hypothesis of an hostile bider reaching the 90% threshold.
With such a weak control, they had almost no bargaining power.
Before july 2020, 4DS could go for less than 100millions,in an hostile takeover .
The only way they had to retain control of the company was to keep silent on the true performance of the cell.
No takeover could take place as long as potential buyers were kept in the dark.
Remember : if you control less than 25%+1 votes, you can't block an hostiletakeover even if the offer is low or very low. If shareholders decide to accept, it's done.
We have many indications that this situation changed after the CR.
First with the CR itself, where 160 millions new shares were created.
Then we had the september 9 run where arround 119 millions shares changed hands for no reason.
Then we had the last four days of october where another 100 millions shares changed hands.
There are no real explanations for those moves except a change incontrol.
It is perfectly possible that those shares where bought by allies of the board on some pre-acceptance arrangement, or cash settled equity swap that only need to be disclosed when a control transaction is on foot (Dentons' Takeover Guide, p.12).
Of course, people enterring those arrangements will ask for something more than the takeover price. It means that members of the board would need to have some certainty concerning the cash that would become avaible to them – personnaly – in the case of a liquidity event, because they will need this cash to pays friends and allies for the risk they took.
IMO, the last CR, and the creation of the cash bonus pool, gave them that certainty.
On that basis, they could make totaly legitimate conditionnal agreements. The money was there.
*****
The key takeaway is that the last CR – by different ways - gave the boardsome room to move and some bargaining power in its relations with WDC.
- If the board managed to secure a 25%+1 voting right (even indirectlyand conditionnaly), they now have a blocking minority and they can forbidanyone to reach full control of the company.
- Having this kind of control, they can start to disclose some criticalmetrics, under NDA.
- If they can disclose critical informations, they are now a target fora takeover by somebody else than WDC (provided the technology worth it, but hey implied it with their "best ever" statement)
It does'nt mean that this scenario will eventuate, but an hostile takeover is now in the realm of possibilities… because critical information is certainly reaching themarketeven with the NDA.
IMO, the SP most recents moves are the result of investors (specialy US investors that are more and more active via Chi-X), becoming aware of this reality.
Slowly, the 4DS board position is becoming stronger.
Each week, the 4DS share is more expensive and the premium that WDC will have to pay is higher.
If WDC wants to have 4DS for less than 400 Millions USD, they have to make a move to freeze everything. Probably before end of year.
… Or, if the price goes out of reach, they can decide that they are happy with the licence and keep silent. Price will retrace a bit in this case.
But the general feeling is that a deal has already been made and that 4DS is just taking due precautions before the final negociation.
Since mid october WDC shares and 4DS shares fluctuate on the same rythm.
More ups and downs for WDC because the SP is impacted by the US situation, but clearly the two companies are up and both seem to wait for some kind of event before end of year or more probably Q1 2021.
-WDC investors are waiting for a possible split of WDC and a possible IPO ofthe NAND part
-4DS is waiting for a takeover offer (preferably in script) from WDC.
Idealy, those two events will be linked (4DS shares paid with shares of the IPOed part of WDC).
This is no financial advice.
No question – no answer.
For more information please read MinterEllison :
"Directors recommandations in schemes
- Navigating the new landscape" by Alberto Colla
And also
"Takeover guide for Australia" (p. 12), at dentons.com
