CNBC Guest Blog
- Busch: Markets Smell a Country Rat
- Schork Oil Outlook: Mission Impossible For The Bears?
- Losey: Asset Allocation At Retirement
- Farrell: Obama Hectored, Ignored and Restricted?
- Don't Dwell on Investment Mistakes; Move on, Like Buffett
- Hirschhorn: Greed...or Fear
- Schork Oil Outlook: Some New Hope For Nat Gas Bulls
- Insights for Growing the Economy: the State of Entrepreneurship
- Tamminen: California Is At It Again
- Dorn: Trading Secrets and Serendipity
MOST SHARED
- The 'Real' Jobless Rate: 17.5% Of Workers Are Unemployed
- Existing-Home Sales Jump To Highest Level in 2-1/2 Years
- Paul: Audit the Fed
- Wave of Debt Payments Facing US Government
- TV Retailer QVC Joins 'Black Friday' Frenzy
- Start-Up Proves Everything Really Is Better With Bacon
- Buffett's Wealth and Fame Hasn't Helped 'Warren' As a Name
- Madoff—The Holiday Drink
- S&P Stocks Trading at New 52-Week Highs
- Nov. 23: Unusual Volume Leaders
- Gold Prices Can Double in 3 Years: Portfolio Manager
- Nov. 23: Unusual Volume Leaders
- Help Wanted—Please Run $4 Billion University
- Apple Comes to AT&T's Rescue
- Rally Could 'Have Some Legs in 2010': Market Strategist
- Investors May Skew Housing Reality
- Buffett's Wealth and Fame Hasn't Helped 'Warren' As a Name
- Are Crazy Retail Deals Good for Business?
- Expect a 'Square Root-Shaped' Recovery: Chief Investor
- Why the Dollar Will Likely Stay Weak for Some Time
- Bear, Lehman Execs Weren't Wiped Out by Crisis: Study
- How Real Estate Investors Skew Housing's Reality
- Even Buffett's Huge Fame Can't Help the Name 'Warren'
- Wave of Debt Payments Facing US Government
- JPMorgan's Dimon Could Succeed Geithner: Report
- Suze Orman’s 'A Healthier, Wealthier You'
- Maria Blog: Are Crazy Retail Deals Good for Business?
- Latest Holiday Drinks: The Madoff...and the TARPatini
RSS FEED
Text Size 
Eliezer Fich
Associate Professor
of Finance
LeBow College of Business
Drexel University
The revelation that Marvel Entertainment [MVL
Loading...
()
] CEO Isaac Perlmutter received option grants for more than a million shares while the merger of his company to Walt Disney [DIS
Loading...
()
] was underway is a recent example of how CEOs of target firms have used this practice for personal gain.
Indeed, in my research paper titled: “Stock Option Grants to Target CEOs during Private Merger Negotiations,” which is co-authored with Jie Cai and Anh Tran, we document that the Marvel situation is just another example of a target CEO benefiting from the private knowledge of the impending acquisition his firm.
In the paper, we examine whether the granting of unscheduled options to target CEOs while merger talks are underway violates securities laws, particularly those aimed at preventing insider trading. After all, during our data collection stage we uncovered many instances in which target CEOs received substantial unscheduled options when their firms were privately been sold.
 |
CNBC.com |
My co-authors and I were baffled to discover that target CEOs, such as Marvel’s Perlmutter, are not technically in violation of Sections 10(b) and/or 16(b) of the 1934 Securities Act which penalize insider trading. Specifically, these laws state that “any person purchasing or selling a security while in possession of material, nonpublic information shall be liable in an action in any court of competent jurisdiction…”
However, well-timed option awards (such as those received by Perlmutter) are not actionable as insider trading violations. This occurs because an option award is technically not a “purchase” of securities for the purpose of the 1934 Act.
Despite the fact that granting unscheduled options to target CEOs might not violate insider trading laws, according to our research, such practice might be costly to target shareholders. This occurs because after receiving the options target CEOs can only cash in the options if deals go through. This might prompt these executives to accept lower takeover bids. In the firms we analyze our estimates indicate that, on average, shareholders in these targets lose about 307 million dollars when their firms are sold.
To put this result into context, for the average target firm in our sample, target value is reduced by 54 dollars for every dollar the target CEO receives from unscheduled options granted during private merger negotiations.
An example of this appears in the figure below (adapted from my paper) which illustrates the stock price of Scientific Atlanta (SA) around its acquisition of Cisco [CSCO
Loading...
()
] systems. According to our estimations, SA’s should have commanded an offer of approximately 44.36 per share. It was sold for $43 per share. As a result, shareholders probably lost close to 209 million dollars when SA was acquired. However, unscheduled options SA’s CEO Mr. James F. McDonald received during merger negotiations were valued at over $2 million.
Finally, we also find (as the Marvel example illustrates) that reporting regulations related to executive compensation promulgated under the Sarbanes-Oxley Act and other laws, have done little to eradicate the practice of granting CEOs unscheduled stock options during private merger negotiations.
The Marvel case along with our findings illustrate potential loopholes in existing securities laws aimed at deterring insider trading and weaknesses in the way executive compensation is reported by public firms. Moreover, we suspect that if regulators go over data related to merges in the recent past, the issue of unscheduled stock options to target CEOs during merger negotiations might reach a status similar to the recent option backdating scandal.
Stock Prices for Scientific-Atlanta. This figure graphs daily closing prices for Scientific-Atlanta from 5/18/2005 until 2/24/2006. These dates coincide with the initiation of merger talks between Scientific-Atlanta and Cisco and the date in which the deal between the two parties is completed, respectively.
 |
Stock Prices for Scientific-Atlanta |
_________________________
Eliezer Fich is Associate Professor of Finance at Drexel University, Le Bow College of Business
Data is a real-time snapshot *Data is delayed at least 15 minutes