Today’s front page article in the Wall Street Journalreports that many firms grant unscheduled option grants to their CEO’s while negotiating their own acquisition. The article, which refers to my research paper titled: Stock Option Grants to Target CEOs during Private Merger Negotiations (co-authored with Jie Cai and Anh Tran), cites recent examples in which CEOs of target firms have ripped millions from this practice.
Consider for example the case of Omniture , an acquisition target of Adobe Systems . Merger talks between these firms began on March 31, 2009. On June 15, 2009 Omniture re-priced old options its CEO held. But the CEO had already received scheduled option on 2/27, so the timing of the June award is puzzling. Moreover, since the merger offer price was $21.50 and the old exercise price (for the re-priced options) was $18.23, the CEO could have made $3.27 per share (or about $2 million on the original award) if the award was never re-priced. Instead, re-pricing the options to $12.99 more than doubled these profits to well over $5 million.
In another case involving Hewlett-Packard and EDS, a proxy filed by Hewlett-Packard detailing its acquisition of EDS reads:
“On November 5, 2007, Mr. Rittenmeyer and another member of our senior management met with Mark Hurd, the chairman, chief executive officer and president of HP, and other members of HP management to discuss, among other things, our purchase and use of HP’s hardware and software products. At this meeting, in addition to discussing these matters, Messrs. Rittenmeyer and Hurd discussed consolidation in the IT services industry. Specifically, Mr. Rittenmeyer expressed an interest in possibly pursuing a transaction in which we would acquire the IT services business of HP. Based on this preliminary discussion, Messrs. Rittenmeyer and Hurd agreed that further consideration of such a transaction was warranted. On November 13, 2007, Mr. Rittenmeyer communicated with the chairpersons of each of the three standing committees of our board of directors regarding his meeting with Mr. Hurd.”
On February 13, 2008, Mr. Rittenmeyer received an unscheduled option award for 2 million shares from EDS with an exercise price of $18.30. A merger between the two companies was announced on May 13, 2008 with an offer price from HP of $25.00 per EDS share. Mr. Rittenmeyer’s profit: over $13 million. It should be noted that the size of the February award significantly exceeds Mr. Rittenmeyer’s two previous annual awards. Please see table and graph below.