Clearify the Confusion of Reverse Merger Between Point Therapeutics Inc. (POTP) And Dara BioSciences

Oct.20, 2007 in Investment Opinions, Market Outlook, U.S Hot Stocks

1. If you read the press release it says “Point and DARA believe that the proposed merger will qualify as a “reverse merger” under NASDAQ Marketplace Rule 4340. As a result, although Point’s common stock is currently listed on NASDAQ, DARA intends to file an initial listing application and satisfy all requirements for initial listing. The INITIAL listing requirement is a $4 bid price, the CONTINUED listing requirement is a $1 bid price. Dara will need to have a $4 bid to keep the listing.

2. You assume that this is a TENDER OFFER by Dara to take over Point. That would be a merger, but this is not. It is an EXCHANGE OFFER by Point to take over Dara. Since Dara is aquired but winds up with the ultimate control position, it is a “reverse merger”.

In a straight tender offer, which you have assumed, the acquiring company buys up the other company’s shares in the open market for cash. If Dara were going to tender for control of Point, they would be required to disclose that intention by filing a Form 13D with the SEC, and they have not. In a tender, already registered shares are acquired so there is no need to register new shares under the Securities Act of 1933.

However, this is an EXCHANGE OFFER. The merger agreement says:

“Each share of DARA Common Stock (excluding any shares described in Section 2.1(b)) issued and outstanding immediately prior to the Effective Time shall cease to be outstanding and shall be converted into and exchanged for the right to receive such number of shares of Point Common Stock (the “Exchange Ratio”) so that the holders of DARA Common Stock, DARA Series A Preferred Stock, DARA Series B Preferred Stock, DARA Options and DARA Warrants receiving Point Common Stock or the right to receive Point Common Stock pursuant to Section 2 hereof collectively own 96.4% of the outstanding shares of Point Common Stock, on a fully diluted basis, following the Closing.”

Read that very carefully. Dara’s shares shall be EXCHANGED for the right to RECEIVE 96.4% of the shares of Point. Point is obligated to deliver the shares to Dara; Dara is not obligated to buy them up. How else do we know these are new shares? Because the agreement requires a 1933 Act registration statement to be filed on Form S-4. The agreement says:

“The information supplied by Point or required to be supplied by Point (except to the extent revised or superseded by amendments or supplements) for inclusion or incorporation by reference in the registration statement on Form S-4, or any amendment or supplement thereto, pursuant to which the shares of Point Common Stock to be issued in the Merger will be registered under the Securities Act”

Read that carefully as well. The registration covers Point common stock TO BE ISSUED IN THE MERGER. Do the math on how many shares will outstanding if Dara in fact has 96.4% and you come up to a number in excess of a billion. Point’s share price matters not at all; there are only three drivers of the reverse split ratio:

1. The number of Point shares outstanding at the merger date, which by the contract will be between 39.3 and 46 million. That implies total pre-reverse split shares of between 1.1 and 1.3 BILLION.

2. The market’s perception of what Dara is worth. Unknown at present, but almost certainly in the tens of million to a few hundred million range.

3. The NASDAQ’s minimum bid price, which is $4 and unlikely to change.

The reverse split ratio will be set such that the ESTIMATED MARKET CAP divided by the POST MERGER, POST SPLIT SHARES will exceed $4. Since the Point share price does not factor into either the numerator or the denominator of that equation, it will not affect the ratio.

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