Thought this timing of granting options cannot be termed as illegal, critics believe that providing such grants at the time of merging helps the parent companies acquire the target with low cost premium relative to other bidders.
As discussed in Chapter 41, stock options were given to the employees of the company in order to provide them with motivation towards team success and organization improvement. But it could lead to ill effects as such the employees trying to do illegal activities like rewriting books in order to keep their options in a profit rate. The article proves as evidence to what was discussed about the illegal activities. The allowance of extra shares to executive officers during a pre-deal affects the value of share holders stocks in a large way.
The grants of the shareholders are affected in two ways, one being positive to them, the other in a negative way. The shareholders can be deprived of their share value with the dilution of its cost by providing extra shares to officers. Or, they can benefit with the incentives that are obtained through the merging with other companies. The executive officers, due to the extensive revenue they get through takeover bids promote mergers and acquisitions in a large way. Examples of such merger acquisition done in the past two years include the taking over of Marvel pictures by Walt Disney, where the CEO reaped $34 millions in cash through selling stock options.
The allowance of providing pre-deal options to executives is termed as a selfish act by critics and is compared in terms with another activity considered to be controversial, "SpringLoading". Though the details were discussed with the SEC, they have declined to take any direct action against it except for ruling that the acquiring companies have to show their annual proxy statements. As the article suggests, the executives convert their options to shares as soon as the deal closes out. This was discussed in the chapter on how the executives "reprice" stock values so that their shares do not get affected in case of any loss. The basic idea of stock options was to motivate the employees as mentioned by EDS in the article, "to motivate executives to achieve long-term goals designed to create sustainable shareholder value and reward them to the extent they achieve such goals." (Maremont) But the current reports are in direct contrast as to how the executives use up the stock options for individual profit.
The article provided a practical knowledge of whatever that was discussed in the course materials. The article was directly related with the stock options, their purpose and their way of usage. The article gave a clear explanation of the executives use the stock options to their benefit, what is the profit they gain from it and what are the effect of it on share holders and share market. The article also provides a possible solution on how to overcome this scenario and make the use of stock options in a positive way. The article has given a great insight on the dealings and discussions that goes off the record in a merger acquisition scenario that can be greatly useful in aiding further understanding of the course.
Maremont, Mark. Option grants draw scrutiny. Wall Street Journal. 13 Oct. 2009. Web. 14 Oct. 2009. http://online.wsj.com/article/SB125530435544579223.html