MSFT's 163 million naked puts.
Just to play Devil's Advocate, think of the new 70mm options grant in another. MSFT is now short calls for 70mm shares of stock. Thus, they have not only transferred some costs that have would have otherwise been a direct cash outflow (due to either the cost of employees leaving or the cost of more attractive cash packages), but they have also actually hedged a significant piece of the 163mm shares that result from the short puts. So instead of increasing the balance sheet risk with the 70mm of options to employees, MSFT has actually decreased the balance sheet risk.
Issuing shares to employees does not hedge the risk at all. MSFT got no money for the 70 million shares issued to employees. If the stock price falls below the exercise price, the employees will simply not buy the shares.
If MSFT had sold calls in the open market, then the calls would function as a hedge against the puts.
So for every naked 10 puts at $70 for which MSFT got, say, $10, MSFT could sell some 70 calls, say 5 to 10, for a premium of $10. Then MSFT would get a $5 to $10 protection to the downside.
However, the calls would act as a significant drag on the stock as it tries to rally. And the employees will be unhappy because the value of their stock options will be diminished by MSFT selling naked calls. And, of course, shareholders will be outraged because selling calls dilutes the stock. For all practical purposes, selling calls is not feasible.
So there are currently no pleasant options for MSFT. |
