Underwater Exchanges

Addressing Underwater Options Measured Responses to a Contentious Problem Presenters Terry Adamson, Senior Vice President, Radford Surveys + Consulting Brett Harsen, Vice President, Radford Surveys + Consulting December 12, 2008

Agenda ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Presenters ,[object Object],[object Object],INTRODUCTION

Market Activity from Radford’s Tender Offer Research www.UnderwaterExchange.com BACKGROUND

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],But Filed Tender Offers Represent Only the Tip of the Iceberg BACKGROUND

What has Changed Since our Last Big Round of Underwater Exchanges in 2001/2002? ,[object Object],[object Object],[object Object],[object Object],BACKGROUND

Repricings Have a Negative Reputation – Radford Advocates Balanced Approach ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Employees  Restore equity value  Maintain ownership Shareholders  Increase return on investment  Reduce dilution Company  Reduce unproductive overhang  Increase employee morale and retention  Restore employee alignment with shareholder interests Employees  Restore equity value  Maintain ownership  Increase return on  Company  Reduce unproductive overhang  Increase employee morale and retention  Restore employee alignment with shareholder interests BACKGROUND

Exchange Alternatives DESIGN CONSIDERATIONS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Advantages ,[object Object],[object Object],[object Object],Cancellation of underwater options for a (typically immediate) cash payment Options-for Cash (8% of offers) ,[object Object],[object Object],Cancellation of underwater options followed by an immediate regrant of ( significantly fewer) new shares of restricted stock/units Options-for- Stock (48% of offers) ,[object Object],[object Object],Cancellation of underwater options followed by an immediate regrant of ( typically fewer) new options Options-for Options (44% of offers) Disadvantages Description Approach

Four Primary Design Considerations DESIGN CONSIDERATIONS ,[object Object],New Award Vesting ,[object Object],Exchange Rate ,[object Object],[object Object],Grant Eligibility ,[object Object],[object Object],Option Holder Eligibility General Shareholder Advisor Voting Guidelines Design Consideration

Option Holder Eligibility DESIGN CONSIDERATIONS

Price Floors RiskMetrics/ISS’ guideline is to establish a floor no lower than the stock’s 52-week high at the time of the offer. However, a minority of offers studied have met this guideline: ,[object Object],[object Object],DESIGN CONSIDERATIONS

Exchange Ratios ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],DESIGN CONSIDERATIONS 6:1 $18.00 $3.00 Options-for-Stock $3.00 Value of Old Option 3:1 $9.00 Options-for-Options Cost Neutral Exchange Ratio Value of New Award Approach

Exchange Ratios – Radford Uniform Distribution Model (Without Historical Data) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],DESIGN CONSIDERATIONS

Exchange Ratios – Radford Hazard Rate Model (Based on Actual Historical Data) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],DESIGN CONSIDERATIONS

[object Object],[object Object],[object Object],Exchange Ratios – Radford’s Expected Life Tables Expected Holding Period From Today (Yrs) EXAMPLE ONLY DESIGN CONSIDERATIONS Time Already Held: Stock Price/ Exercise Price Ratio 4.1-6.0 Yrs 2.1-4.0 Yrs 0.0-2.0 Yrs 3.0 3.5 4.0 80% 3.0 2.0 2.0 2.5 100% 1.0 1.5 120%

Vesting of New Awards Mapped Vesting — transfers the vested position of the underwater award to the new award Full Vesting Reset — introduces a fresh vesting schedule to the new award based on typical practices (e.g., four years) Partial Vesting Reset — new award is reset to zero vested at grant, but uses a shorter schedule than is typically used for equity awards (e.g., two years instead of the normal four year requirement) DESIGN CONSIDERATIONS

Shareholder Friendliness “Tests” DESIGN CONSIDERATIONS

SEC Tender Offer Rules ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],IMPLEMENTATION CHALLENGES

[object Object],[object Object],Communication and Administration Legal Tender Offer Filing Only IMPLEMENTATION CHALLENGES Emails and/or Letters Recorded, Scripted Webcasts Live Employee Meetings/ Presentations Q&A “Hotline” More Conservative Less Conservative

Getting Started – Shareholder Approved Programs can Take 4-5 months to Design and Execute ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],NEXT STEPS

Questions? Thank You! www.UnderwaterExchange.com Radford Underwater Option Portal Brett Harsen: [email_address] +1 (312) 381-3695 Terry Adamson: [email_address] +1 (215) 255-1802

Underwater Exchanges

Recommended

Recommended

More Related Content

Similar to Underwater Exchanges

Similar to Underwater Exchanges (20)

Recently uploaded

Recently uploaded (20)

Underwater Exchanges