Update: We have renamed the Title of this topic to step aside from the specific case of the Stride application. Instead we want this topic to become a potential reference in the future for merger & acquisition cases within the AEZ.
Building upon our previous discussion outlined in this post (Convert entire STRD supply to ATOM - #112 by Govmos), we have decided to transition our focus towards a more practical approach. Rather than solely debating the possibility and merits of a merger, we are now delving into the steps needed to facilitate it. The objective is to emphasize the inherent complexity and duration of such a process, necessitating a thorough grasp of all intricacies and potential financial structures involved.
After reviewing early community feedback, we identified a significant concern on the Hub’s side regarding the creation of new ATOMs. To counter this concern, we propose an initial analysis demonstrating that the merger can be achieved without minting any new ATOMs. Our suggestion involves adopting a convertible bond framework for the merger. While these terms may evoke traditional finance connotations, we believe that a financial matter like this necessitates financial engineering solutions, as elucidated in our previous post. The paramount objective is to negotiate suitable compromises benefiting all parties involved, should the merger come to fruition.
We posit that the most equitable approach for merging Stride and the Hub involves employing a convertible bond system. This solution offers advantages to both parties and their shareholders. The bond can be traded freely in the market throughout its tenure until final expiration. Throughout the bond’s lifecycle, the existing financial agreement between Stride and the Hub regarding revenue sharing would remain intact. Specifically, 15% of the protocol’s revenue would go to ATOM holders, leaving 85% to accumulate within the bond contract. We envision the possibility of a coupon system, where a portion of these revenues is allocated to bond holders, akin to bond coupons in traditional markets. The bond would carry a redemption right tied to the accrued revenues during its lifetime.
The bond’s duration would be determined using valuation models to estimate how long it would take for protocol revenues to reach the expected acquisition price. Subsequently, the free market would enable users to decide whether they believe the accrued value will surpass expectations, offering greater flexibility to the holder and a cost-effective financial investment for the issuer.
Only a fraction of ATOMs would need to be provisioned initially to allow the conversion to ATOMs at the predefined rate (STRD to ATOM conversion + Premium). Subsequently, few beneficiaries would require immediate conversion, most holders would rely on the free market as arbitrage strategies come into play to adjust bond prices. A detail of the arbitrage strategy can be found here: Convertible Bond Arbitrage: Definition, How It Works, Examples
Supply and demand dynamics in the market would influence prices over time as revenue growth aligns with expected performance. If the redemption is set to ATOMs, the bond contract would convert LSTs revenues to ATOMs regularly. This solution could offer added advantages if some tokens were converted into stATOMs to accrue staking rewards and bolster the Hub’s security. The bond contract could also include a staking reward distribution on a regular basis, resembling a coupon for the holders. The adaptability of this solution is a significant advantage.
Ultimately, at the bond’s maturity date, redemption for ATOMs would be facilitated for every bond holder based on all accrued rewards in the bond. While this amount may vary from the convertible rate, the bond price would have factored this in throughout its entire lifecycle.
NOTES: It’s important to note that this proposed financial approach is just one of many possibilities for the merger. The aim of this post was to underscore the potential for achieving the merger without minting a single ATOM, utilizing free market forces to establish a fair price and granting participants the freedom to enter or exit the bond as per their preferences. In this scenario, the @Stride team would have vesting associated with their bonds.
APPENDIX: For those seeking in-depth insights into the utilization of convertible bonds in mergers, we recommend referring to a comprehensive research article supporting our assertions: https://www.sciencedirect.com/science/article/abs/pii/S0378426611002147
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