What should you know about Net-Exercises and Stock Settled SARS?
What should you know about Net-Exercises and Stock Settled SARS?
Using this strategy may reduce shareholder equity (book value.)
Using this strategy does remove the treasury function of buying shares in the open market with the grant and tax proceeds. Cash proceeds are not available due to issuance of only the net shares.
The goal of the optionee is to sell at the highest price and the goal of buying back shares is to buy at the lowest price.
Questions - What is the average fair market value when an optionee exercises?
Question - What is the average purchase price of company's buyback?
Question - Is the difference cash?
Would the company, or it's shareholders, be better served by the company receiving proceeds from a cashless exercise and repurchasing shares through a buyback program that has the same anti-dilutive effect as a net exercise?
A study was presented to Treasurers and Chief Financial Officers at the Association of Financial Professional's National Conference. The study illustrates that if the Fortune 200 companies had all utilized a Net-Exercise method over a three-year period they would have lost nearly 4 Billion dollars in book value.
The average company in the study would have lost about 10 Million dollars of cash, reducing shareholder equity, annually.
While tax and accounting issues are very important, analysis should also consider the true economic impact.
Results of this study are available upon request.
Robert J. Callanan Jr.
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PLEASE READ THIS POSTING IF YOU ARE CONSIDERING NET SETTLED OPTIONS OF STOCK SETTLED SARS
I have just taken a look at Bob's data and a recent presentation he
did for the Association for Financial Professionals (AFP). It includes
some very important facts to consider when deciding whether to roll out
stock-settled SARs or net-settled options.
Among the interesting
data:
trading price. While this is good for the optionees it is also good for
stock repurchase programs since the company can buy back shares at less
than the price they were sold.
volume may benefit from
well-managed treasury buy-back programs and typical same-day-sales.
These companies may find that the volume and frequency of exercises
gives them ample opportunity to buy back shares at a discount from the
price at exercise
may benefit more from
net-settled programs. The lack of both volume reduces the impact of the
discount. While the lack of consistently predictable exercises makes
it difficult for a Treasury department to plan for repurchases.
While there has been a big industry push for stock-settled SARs and
net-settled exercise programs (search the ECE site for great discussions
on this, such as the info from Anthony Eppert's blog), until now the arguments against these programs have been
mainly based on administrative and communication issues. This data
shows that, for some companies, there is a significant financial reason
to stay with traditional options and exercise methodology.
Contact
Bob through his ECE profile. My guess is that he would be happy to
forward his presentation to interested parties.
I should
mention that I have known Bob Callanan for more than a decade. In my
opinion he has always been one of the most thoughtful financial advisors
in terms of really knowing the equity compensation industry and its
impact on both companies and participants.