Microsoft cashing out ‘worthless’ stock options
Published 9:00 pm Friday, December 12, 2003
SEATTLE — A Microsoft Corp. program allowing workers to turn in their largely worthless stock options will result in payouts of $382 million over the next three years, the company says.
The 18,500 workers who participated in the program will receive their first payment, totaling $218 million, by the end of this month. Microsoft will shell out the rest in December 2005 and December 2006. The company decided not to pay in 2004 as a way to retain employees.
About $146.7 million of the payments made this month will go to 12,000 workers in the Puget Sound region.
"We need some shots in the arm, and the $146 million from Microsoft is imminent. It is great news for local retailers," chief state economist Chang Mook Sohn said Thursday.
Options are opportunities to buy stock at a set price. For example, at the time a worker is hired, he might be told that in five years, he would be allowed to buy the company’s stock at $10 a share, even if the stock was trading at $20 a share or higher. The worker could make an instant profit by exercising his option, then selling his stock.
Over the years, Microsoft used options to lure employees, and many became millionaires by cashing them in during the tech boom of the late 1990s. But lately, Microsoft’s stock price has flagged, making the options less enticing, and the company is switching from offering options to offering stock grants.
Thousands of Microsoft employees had options to buy stock at $33 or higher, but the stock has been trading in the mid-$20s, making those options essentially worthless, or "under water."
Microsoft devised a program by which workers could sell their options to J.P. Morgan Chase Bank for an amount that depended on the price of the option, Microsoft’s closing stock price averaged over a 15-day period, and other factors. Slightly more than half of the 36,500 eligible employees participated, selling J.P. Morgan more than 344 million options. J.P. Morgan is paying Microsoft $382 million, which is then going to the workers.
J.P. Morgan, which now has the rights to the options, also received $17 million in fees from Microsoft for handling the transaction.
Sohn compared the effect on the local economy to that of the hefty bonuses Boeing typically gave out each December until a few years ago. Another state economist, Roberta Pauer, said the $146 million represents a 1 percent boost in total wages paid in King County for the quarter.
The metropolitan Seattle area is emerging from a 2 1/2-year recession during which it lost 100,000 private-sector jobs.
"By the time we get to 2005 and 2006, the payments won’t make much of a difference because the economy will be in good shape, back to normal," Pauer said. "But right now $146 million makes a difference."
Microsoft shares rose 2 cents Thursday to close at $26.61 on the Nasdaq Stock Market.
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