Microsoft Unveils Under-water Option Plan Details

September 17, 2003 ( - Microsoft says that employee stock options covering $18.8 billion of stock could be retired under the software giant's decision to abandon issuing stock options to its workers.

According to an SEC filing, Microsoft says that around 42% of all its outstanding employee options will be covered – and that most Microsoft employees who choose to sell their options will only get a third of the proceeds this year (the rest paid over an unspecified period – but only if they continue to work for the firm).

The company also arranged for workers with “under-water” options, those with strike prices above the current market price, to sell their options immediately under an agreement with JP Morgan.   According to the Financial Times, JP Morgan will offer to purchase options covering 650 million shares with exercise prices of between $33 and $59.56/share (those above the current market price).

JP Morgan will sell 650,000,000 Microsoft shares as part of the arrangement, according to Tuesday’s SEC filing, worth some $18.8 billion at Tuesday’s closing price.   However, the bank then expects to buy back “substantially more than half” of the stock, according to the report.   The exact amount will depend on the hedging strategy designed to protect it from losses as a result of the option retirement plan, according to the filing.

The bank will receive a fee based on the number of options it buys, though Microsoft did not disclose the size of the fee or the method that would be used to calculate the value of the under-water employee options.

The calculation will be based on the company’s average share price over a 15-day period, with employees being given four weeks to decide whether to accept the offer.