Stock Grants at Apple and HP

Hi Bruce,

Great article.  I just posted a fairly lengthy comment on your blog.  I hope other ECE members will take a moment to opine (love that word!) on the same.

Dan

Bruce: The part of your article on the ESO grants to Meg Whitman is quite interesting to me.

I would like to follow up with a few questions.

1. What is your view of the theoretical value (true value) at grant of the ESOs that have the performance conditions in comparison to the theoretical value of the average grants to executives with no performance conditions.

2. What would you advise her to do if three years from now the stock is trading at 39 with no change in volatility, interest rates and expected dividends? And Why?

john Olagues

John, Given your expertise, my bet is that you have insightful answers to the questions you asked. For the CEO of HP, assume that she has hedging restrictions and shareownership requirements that must be followed.

Dear Bruce:

I am not sure whether she has restrictions against hedging or share holding requirements and I have not read the stock plan document or her grant agreements or any other agreement that she may have.

However, in my view she is probably not restricted by contract from hedging and not restricted from selling covered calls, although if she did hedge or sell calls that would signal to other grantees that it is proper to hedge or sell calls. The companies do not want to send such messages to the other grantees as the companies and wealth managers to grantees want early exercises.

Linked below is somewhat a history of Whitman's ESO grants and exercises and sales of stock:

http://www.secform4.com/insider-trading/1079816.htm

Most of her exercises were very much premature although the Ebay shares did not appreciate much since she sold the  stock that she received from exercises. She would have done much better if she would have sold calls versus the majority of the stock instead of making premature exercises and selling. I can find no other CEO of a major company who made such premature exercises.

Regarding the question about the comparative value of Whitmans HPQ ESOs versus the traditional type with ten years to expiration, longer vesting with no stock performance requirement, the theoretical costs to the company are the same for the 300,000, about 4% lower for 800,000 and about 8%-10% lower for the second 800,000 in my rough calculation.

However, since the grants were made at near the stock's low for five years, the value to her was probably greater than the B-S "fair value" would indicate for the company costs.

On the other hand, given her history of making very early premature exercises at Ebay, perhaps the value to herself should be discounted by the expectation that she would do the same with HPQ ESOs.

I invite anyone to add further insight.

John Olagues