SharpBlond:
At first I thought that the (up to) $1 billion share buy back was a statement of confidence by EB and the 3Com BOD in the company's future. But a closer look at the distribution Q&A shows that the reason is also likely related to the imminent expansion of the share base due to the effect of the treatment of 3Com employee stock options:
(1) As of 4/24/00, there were a total of 41 million employee options outstanding, 4 million of which are held by now PALM (formerly COMS) employees.
(2) Of the 41 million options, 14 million are immediately exercisable, 1.4 million of which are held by now PALM (formerly COMS) employees. As far as I can tell from the PALM S-1's and the COMS 10K's, the weighted average exercise price of these 14 million options is between $25 and $30, so it's a no brainer for the COMS/PALM employees to exercise them before the record date of 7/11/00 so that they become actual COMS shares which will get them their shares of PALM. Presumably 3Com will get the proceeds to add to its cash hoard, another $350 to $420 million depending on the exercise price.
(3) Those 14 million new shares will of course decrease the distribution ratio from 1.52 (532/351) to 1.46 (532/365) unless 3Com pro-actively buys them before 7/11/00 - unlikely IMO. If they buy back COMSv shares between 7/11 and 7/27, the ratio will be unaffected, but the COMS sans PALM stock price would be supported.
(3) Subtracting the 14 million from 41 million leaves 27 million options outstanding, of which 2.6 million will be held by PALM employees and will be converted into PALM options. The remaining 24.4 million COMS employee options will be "adjusted" to preserve their intrinsic value. By way of example only, let's assume PALM is trading at $40 and COMS at $80 on D-Day, leaving COMS trading at $20 the next D-Day. Those 24.4 million COMS employee options become 97.6 million (24.4 x 80/20) new COMS options with an exercise price of around $7 ($25 to $30 x 20/80).
(4) The number of COMS shares used to report EPS in the last 10Q was 345.7 basic/360.6 diluted, a difference of 14.9 million, which would appear to reflect only the exercisable options and not the total 41 million granted. Per the PR Q&A, there are now 351 million shares outstanding, and this would rise to 365 million with the 14 million employee options exercised.
(5) I thought that the diluted share count included all options, and not just the immediately exercisable ones, but the 41 million number is certainly not reflected in the latest 10Q report. If COMS has to include part or all of the expanded number of options created by the adjustment, then the diluted share count is going to increase dramatically by up to 73.2 (97.6 - 24.4) million shares. I guess we'll see.
The point is that there will be an increase in the outstanding number of shares by at least the 14 million, and in the diluted number of shares by maybe a lot more. Strong incentive for COMS to buy back shares to offset the effect on EPS.
David T. |
