DJ Microsoft Faces Pay-Up Time On Put Warrants Against Stk
21 May 08:15
By Marcelo Prince
Of DOW JONES NEWSWIRES
(This report was originally published late Friday.)
NEW YORK (Dow Jones)--With the bull market gone, so are the days of easy
money for those technology companies, like Microsoft Corp. (MSFT), that
profited mightily from the hedging strategies they used to cushion their stock
buybacks.
After pocketing about $1.5 billion over the years on selling put warrants
against its own stock, Microsoft has recently found itself in the unusual
position of actually having to pay out. And the Redmond, Wash., company appears
to have lost its appetite for these financial instruments.
In 1994 Microsoft pioneered the idea of selling put warrants to help defray
the cost of its stock repurchase programs. It has since sold millions of these
puts to investment banks in private deals.
The warrant grants the holder, who's betting the share price will decline,
the right to sell Microsoft shares back to the company at a set time and price.
But with its stock soaring, the puts would often expire worthless and Microsoft
would get to keep the tax-free premiums.
But the swoon in the stock market and Microsoft shares has coincided with
the maturity of some of these warrants, which typically expire over one- to
three-year periods. Although Microsoft shares have rallied 58% this year, most
of these warrants remain in the money and the company is on the hook.
Last quarter, Microsoft issued 2.8 million shares to settle some of these
outstanding warrants, according to documents filed with the Securities and
Exchange Commission this week. The issuance undercuts the company's efforts to
buy back stock.
"The idea was to retire shares, now they are actually issuing incremental
shares," said Robert Willens, a tax and accounting expert at Lehman Brothers
Inc. "It's become a real burden for them."
A Microsoft spokeswoman notes that although the company had to issue new
shares, it still repurchased 17.2 million shares during the period. She adds
that the company set strike prices on the puts at which it was comfortable
purchasing the stock.
It's not the only company that has had the tables turned. 3Com Corp. (COMS)
took a $90 million cash charge in its fiscal fourth quarter to settle poorly
timed options trades in its own stock that were intended to hedge its share
buyback. It plans to take additional charges to settle those puts that are
still outstanding.
Dell Computer Corp. (DELL), which has aggressively used options trading to
hedge its stock buybacks, also currently finds itself on the wrong side of some
trades. It has puts outstanding on 111 million shares with an average strike
price of $44 and 69 million shares with an average strike price of $39.
Assuming its shares remain at $25, settling those puts as they mature over the
next three years would cost Dell about $3 billion.
For its part, Microsoft still has put warrants for 94 million shares
outstanding with strike prices ranging from $70 to $78 a share. These expire
starting next month through March 2003.
With its stock at $69 and assuming an average strike price of $74 on the
puts, Microsoft would have to spend a net $470 million - or issue the
equivalent in stock - over the coming years to settle those warrants.
"It hasn't worked out the way they had hoped lately," Willens said. "Given
where the stock has been, it's become more risky."
Greg Maffei, Microsoft's previous chief financial officer, spearheaded the
idea of selling put warrants in conjunction with stock buybacks when he was the
company's treasurer in 1994. He departed in January 2000 - to become chief
executive of 360networks Inc. (TSIX) - and Microsoft, under CFO John Connors,
appears to have lost its appetite for such warrants.
The number of put warrants has steadily declined at Microsoft since Maffei's
departure, when there were puts on 163 millionshares outstanding. That
suggests more puts are expiring or being exercised than the company is
selling. (The company wasn't able to repurchase shares or sell puts from
January 2000 through August 2000 because of an acquisition.)
"Now that the market has become more volatile ... it does make sense to sit
back and wait," says Michael Kliegman, an accounting expert at
PricewaterhouseCoopers. "The case is far less compelling to go ahead and do
anything."
Some investors might read the drop in Microsoft's put activity as a sign that
the company is less confident that its shares will continue to rise. But
Kliegman says it could simply be more willing to take its chances buying stock
in the open market.
One banker who deals in these puts points to a possible accounting rule
change that would make such options activity less attractive to companies. He
also notes that with the stock well off its highs there's likely fewer
employees exercising options and less of a need for Microsoft to buy back
stock.
Microsoft declines to say whether it continues to sell put warrants. "It's
at the board of directors' discretion and they review this from time to time,"
a spokeswoman says. She notes that when Microsoft adopted its latest
share-repurchase program, in August 2000, it kept the option.
If it abandoned the idea, Microsoft wouldn't be the first. Intel Corp.
(INTC), which like Microsoft and Dell had been an aggressive seller of put
warrants, stopped its program last summer, just before its stock tanked.
-Marcelo Prince, Dow Jones Newswires; 201-938-5244,
marcelo.prince@dowjones.com
(END) DOW JONES NEWS 05-21-01
08:15 AM |
