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With enough money could you short a profitable company into bankruptcy?

qubex 8y ago
Yes. It’s a strict subset of “the market can stay irrational longer than you can stay solvent” class of financial disasters.
basetop 8y ago
No for two reasons. 1. Share price has nothing to do with bankruptcy. Bankruptcy happens when a company can't meet its obligations and debts. If a company is profitable, then by definition, it met its obligations and debts so it cannot go into bankruptcy. You go to bankruptcy protection to ward off creditors. If you are profitable, you paid off your creditors and made money on top of that so there is nothing to protect you from. 2. Shorting involves borrowing shares. There are a finite number of shares that you can borrow. So you could have an infinite supply of money but your broker only allows X amount of shares available to short. Shorting doesn't cause bankruptcy. It's a method of profiting when companies veer towards bankruptcy of their own accord. Think of it as surfing. The surfer doesn't cause the wave, he just rides the wave.
- raiyu 8y ago
  Depending on how their debt is structured if it's linked to stock price then it's possible to force a liquidity event on outstanding debt through depleting the share price. I think the recent $960MM debt payment was actually linked to not hitting specific share price hurdles. Given the massive amount of debt they have outstanding versus capital on hand you could technically do that. However shares have to be available for shorting in order to achieve that.
  - soperj 8y ago
    Yeah, same with the $700 million one in November.
  - kwindla 8y ago
    There are some recent instances of companies being forced into a liquidity event by hedge funds exploiting bonds in unforeseen ways. So, way more complicated than shorting stocks, but kind of related to the parent question: Matt Levine has written a couple of excellent ruminations on the mechanics, social value or lack thereof, and ethics of this. > In Windstream, a hedge fund (Aurelius Capital Management LP) discovered that a company (Windstream Holdings Inc.) had already violated the terms of its bonds, so it bought those bonds and sued for a declaration that they were in default. Nobody agreed on the default, or manufactured it, or cut any backroom deals. Last week Aurelius won in court, and yesterday Windstream filed for bankruptcy. https://www.bloomberg.com/opinion/articles/2019-02-27/windstream-bankruptcy-will-destroy-value-eliminate-profits https://www.bloomberg.com/opinion/articles/2019-02-27/windst...
  - AnthonyMouse 8y ago
    > However shares have to be available for shorting in order to achieve that. Is this a real barrier? Lending shares to short sellers at interest is basically free money to anyone who would be holding them regardless.
    - mcguire 8y ago
      The last time I looked, I thought setting up a margin account made shares available for borrowing, but I've never received interest from borrowed shares. The interest goes to the broker?
      - optimiz3 8y ago
        Yes. However better brokers will give you a cut of the interest.
  - tim333 8y ago
    >The $920 million in convertible senior notes expired March 1, at a conversion price of $359.87 per share. So the holder had the option of cash or shares at $359.87 each and took the cash naturally.
- dx034 8y ago
  You could maybe short it into a takeover. If enough stocks are available (or volume is low enough that the price effect of the short is sufficient), the company could become cheap enough to be bought by a competitor. But I'm not sure if that would work in practice, as shorts would likely close positions as soon as rumors about the takeover come out.
  - basetop 8y ago
    I suppose that's possible for an already distressed company under financial strain desperate to sell itself to avoid bankruptcy. But I'm not sure how that would work on a profitable company. No board of directors would approve selling itself for an short-driven discount. A takeover of a profitable company involves a premium, not a discount. A profitable company can wait out a short position. Hell insiders of a profitable company would be buying shares in droves in anticipation of crushing shorts.
- elefanten 8y ago
  Yes, and similarly to surfing, if the wave only keeps growing and never crashes... the surfer is boned.
soperj 8y ago
The shorts are why the stock got to where it is in the first place. It was around $40 when there was a huge short squeeze, and that popped the price of the stock to like $180.
- AnthonyMouse 8y ago
  A short squeeze is a temporary phenomenon. Short sellers expect the company to do worse than it does, they turn out to be wrong and then many try to buy the stock and close their positions at once before the stock goes even higher (and so that they can stop paying interest), which requires them to buy the stock for a premium from people who aren't particularly inclined to sell it just then. That only lasts as long as the lack of liquidity, which can be a little while but the events you're referring to were six years ago.

Yes. It’s a strict subset of “the market can stay irrational longer than you can stay solvent” class of financial disasters.

basetop 8y ago

No for two reasons. 1. Share price has nothing to do with bankruptcy. Bankruptcy happens when a company can't meet its obligations and debts. If a company is profitable, then by definition, it met its obligations and debts so it cannot go into bankruptcy. You go to bankruptcy protection to ward off creditors. If you are profitable, you paid off your creditors and made money on top of that so there is nothing to protect you from. 2. Shorting involves borrowing shares. There are a finite number of shares that you can borrow. So you could have an infinite supply of money but your broker only allows X amount of shares available to short. Shorting doesn't cause bankruptcy. It's a method of profiting when companies veer towards bankruptcy of their own accord. Think of it as surfing. The surfer doesn't cause the wave, he just rides the wave.

raiyu 8y ago
Depending on how their debt is structured if it's linked to stock price then it's possible to force a liquidity event on outstanding debt through depleting the share price. I think the recent $960MM debt payment was actually linked to not hitting specific share price hurdles. Given the massive amount of debt they have outstanding versus capital on hand you could technically do that. However shares have to be available for shorting in order to achieve that.
- soperj 8y ago
  Yeah, same with the $700 million one in November.
- kwindla 8y ago
  There are some recent instances of companies being forced into a liquidity event by hedge funds exploiting bonds in unforeseen ways. So, way more complicated than shorting stocks, but kind of related to the parent question: Matt Levine has written a couple of excellent ruminations on the mechanics, social value or lack thereof, and ethics of this. > In Windstream, a hedge fund (Aurelius Capital Management LP) discovered that a company (Windstream Holdings Inc.) had already violated the terms of its bonds, so it bought those bonds and sued for a declaration that they were in default. Nobody agreed on the default, or manufactured it, or cut any backroom deals. Last week Aurelius won in court, and yesterday Windstream filed for bankruptcy. https://www.bloomberg.com/opinion/articles/2019-02-27/windstream-bankruptcy-will-destroy-value-eliminate-profits https://www.bloomberg.com/opinion/articles/2019-02-27/windst...
- AnthonyMouse 8y ago
  > However shares have to be available for shorting in order to achieve that. Is this a real barrier? Lending shares to short sellers at interest is basically free money to anyone who would be holding them regardless.
  - mcguire 8y ago
    The last time I looked, I thought setting up a margin account made shares available for borrowing, but I've never received interest from borrowed shares. The interest goes to the broker?
    - optimiz3 8y ago
      Yes. However better brokers will give you a cut of the interest.
- tim333 8y ago
  >The $920 million in convertible senior notes expired March 1, at a conversion price of $359.87 per share. So the holder had the option of cash or shares at $359.87 each and took the cash naturally.
dx034 8y ago
You could maybe short it into a takeover. If enough stocks are available (or volume is low enough that the price effect of the short is sufficient), the company could become cheap enough to be bought by a competitor. But I'm not sure if that would work in practice, as shorts would likely close positions as soon as rumors about the takeover come out.
- basetop 8y ago
  I suppose that's possible for an already distressed company under financial strain desperate to sell itself to avoid bankruptcy. But I'm not sure how that would work on a profitable company. No board of directors would approve selling itself for an short-driven discount. A takeover of a profitable company involves a premium, not a discount. A profitable company can wait out a short position. Hell insiders of a profitable company would be buying shares in droves in anticipation of crushing shorts.
elefanten 8y ago
Yes, and similarly to surfing, if the wave only keeps growing and never crashes... the surfer is boned.

soperj 8y ago

The shorts are why the stock got to where it is in the first place. It was around $40 when there was a huge short squeeze, and that popped the price of the stock to like $180.

AnthonyMouse 8y ago
A short squeeze is a temporary phenomenon. Short sellers expect the company to do worse than it does, they turn out to be wrong and then many try to buy the stock and close their positions at once before the stock goes even higher (and so that they can stop paying interest), which requires them to buy the stock for a premium from people who aren't particularly inclined to sell it just then. That only lasts as long as the lack of liquidity, which can be a little while but the events you're referring to were six years ago.