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Technology Stocks : PSFT - Fiscal 1998 - Discussion for the next year -- Ignore unavailable to you. Want to Upgrade?

To: The Player who wrote (3649)	11/20/1998 2:14:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 4509

The Player, it is really quite simple when you think about it. Let's take a hypothetical company, XYZ, with a market cap of $1 billion with 10 million shares outstanding. Each share is therefore worth $100. Now suppose that there are options that are suddenly 1 million options granted to purchase the stock at $80. Therefore, the number of shares would rise to 11 million, and the capitalized value would rise to $1,080 MM. But since there are now 11 million shares outstanding, the price of each share has dropped to $98.18. Now suppose that management decides (for whatever reason) that the options need to be repriced at $50. Now the capitalized value of the company drops to $1,050 million, again on 11 million shares, so the value of each share drops to $95.45. The impact, as you can see, is the fact that insiders are allowed to buy these shares at a price that causes the shares in the hands of existing shareholders to decrease in value. What I just demonstrated above was how management picked the pocket of previously existing shareholders by $27.3 million [(98.18-95.45)*10MM]. TTFN, CTC

To: The Player who wrote (3649)	11/20/1998 2:20:00 PM
From: gc	Respond to of 4509

The financial impact is minimal. The major impact is psychological. It tells me that the management does not believe the stock will rebound in near term. The recent creative financial engineering wrt Momentum may have diffused an earning shortfall (on its book) in 4Q. Next several quarters could be interesting. gc.com

To: The Player who wrote (3649)	11/20/1998 2:54:00 PM
From: Tom Smith	Read Replies (1) \| Respond to of 4509

Player, A couple of years ago I held stock in another company that repriced options. In the SI discussion that followed, I was asked a question similar to yours. Here is the question and my response. Hope it helps. Question: Does the "re-pricing" of the options reduce the total value of the ongoing business? My first instinct is to say "no" if no additional options are granted. But say an outstanding option is re-priced from $18 to $8, for example- where does that extra $10/share come from that will go into the directors' pockets? Out of the "market"? Or out of the value of the company? Response: An interesting question you pose. The answer really depends on the price of the stock at the time the option is exercised. Here are two scenarios using your example of options repriced from $18 to $8: (1) Let's say the stock price is between $18 and $8 when the options are exercised. Say the price is $13. In this case, the executive pays the company (i.e., the shareholders) $8/share and sells them to the market for $13. This does two things: (a) dilutes the percentage ownership represented by each share in the company, since there are now more shares outstanding, and (b) drains demand for the stock in the market by removing the buyers who bought the shares at $13. The key in this case is that the options would never have been exercised at all if they had not been repriced. Shareholders are generally willing to accept (a) and (b) as consequences if stock price targets are legitimately met by the company. It is unfair to us, though, to incur these costs even when the stock has not performed well. (2) On the other hand, suppose the stock price is above $18 when the options are exercised. In this case, the options will be exercised regardless of whether they were repriced or not. Now, however, the company gets only $8/share from the executive when it would/should have received $18/share. Here, the entire cost of the repricing shows up in the company's cash balance and there is no direct market impact. You can argue, however, that there is an indirect market impact because the company ends up with less cash and will therefore be priced accordingly in the market. There is also a third scenario in which the stock price stays below $8. In this case, the options are not exercised even at the new price of $8, so there would be no impact. Of course, there would be nothing to prevent the options from being repriced again! Tom