Very interesting write-up on CY, in TheStreet.com. Long since the low $10's as mentioned here late April/early May.
What's up with Cypress Semiconductor (CY:NYSE)? In late March,
company insiders exercised large blocks of long-held stock options, acquiring
nearly 700,000 shares between them. Better yet, instead of subsequently
selling, they held onto every share.
Prominent among those exercising is CEO T.J. Rodgers, who accounted for
more than 200,000 of the shares acquired. Also in the mix: Chairman Eric
Benhamou, CFO Emmanuel Hernandez, Director of Research and
Development Antonio Alvarez and others. And no, the vast majority of the
options were not due to expire anytime soon -- not, in fact, until 2003. Highly
unusual.
In the past when Cypress insiders exercised options, they, like most insiders,
abruptly cashed out. The current purchases, meanwhile, were facilitated by
company loans. Make no mistake, this is no ordinary loan program. Most
company-sponsored loan programs are designed to maximize publicity. They
are accompanied by much fanfare (e.g. press releases) and aimed at enticing
insiders to buy in the open market. Cypress, by contrast, has been extremely
low-key: There's no mention of loans to company executives in the company's
April 7 proxy filing.
The activity is all the more unusual because insiders who do not want to part
with cash to exercise their options have lots of other alternatives. The easiest
is simply returning some of the shares to the company to satisfy the balance
due. Not only is this practice common (and remarkably painless), it has been
used liberally by Cypress insiders in the past. Instead, by borrowing to
exercise options, these execs have maximized their holdings, thus leveraging
their exposure to any rise (or fall) in Cypress' share price.
Finally, many of these were nonqualified stock options. It is a little-known fact
that so-called nonquals carry tax ramifications that penalize insiders should the
stock drop after exercise. The upshot is that, by exercising nonqualified
options -- and not selling the underlying shares, the insider pays capital gains
tax on his or her paper gain, even if that gain is subsequently wiped out by any
fall in the share price. Because of this risk, it is an exceedingly bullish sign to
see insiders exercising their nonqualified options and holding onto the shares.
The question, then, is why? Or better yet, why now? According to CFO
Hernandez, the loans were offered to encourage the exercise of options. This,
he says, would facilitate the desired pooling-of-interest accounting for
Cypress' recent acquisition of IC Works. Whatever the case, history teaches
that when insiders exercise nonqualified options and hold onto the shares, the
activity often precedes a significant rise in the share price.
At Coca-Cola (KO:NYSE) in the mid-1990s, for example, insiders exercised
nonqualified options in large numbers ahead of news that Warren Buffett had
taken a position in the stock. They were rewarded as the share price
quadrupled over the next four years.
You've got to like the tape action in Cypress so far. Note the persistent
bidding at the 10-11 range, even during periods of tech sector weakness.
Likewise, the shares consolidated at around 10 before last week's quick jump
to a new high of 12 1/4.
Over the years, we've grown accustomed to such insider behavior as a
precursor to potential takeover activity. Earlier this month, Cypress
competitor VLSI Technology (VLSI:Nasdaq) agreed to be bought out by
Royal Philips Electronics (PHG:NYSE) at 21, more than twice the going price
as recently as March. It just so happens that VLSI executives were also
exercising nonqualified options before the announcement. At Cypress
Semiconductor, the insider picture couldn't be more fascinating. Wall Street
games are rarely as simple as they appear, particularly when trying to assess
the behavior of insiders. |
