COMMENTARY -- Why reprice when you can replace?
Sprint (NYSE: FON) reported its third quarter results today, but the more interesting news came with a concurrent announcement that the communications giant would give employees new options in lieu of the ones issued last year. About 24,000 workers can choose to cancel their 2000 options grants and get new ones in May.
Companies with falling stock used to lower the exercise price of their options, justifying it as a necessary way to keep employees. Investors screamed that repricing was nothing more than a reward for poor performance, and amounted to an unfair advantage for employees over shareholders, who have no way of recovering lost equity.
The debate seemed to become moot when the Financial Accounting Standards Board earlier decided that the rules require companies to record additional charges for options repricing. That soured companies on the whole idea.
Keep in mind that "repricing" actually means cancelling the old grants and immediately issuing new ones that pick up the vesting where the old ones left off.
Sprint is doing things a little differently.
Under the plan unveiled this morning, the replacement grants don't go into effect right away, but rather would be issued in May. They will have new vesting requirements, the company says.
And unlike repricing, which is automatic, these new grants only come if employees choose them. They probably will do so, since the 17.8 million FON options covered by the proposal have an average strike price of $59.15, or more than double the current stock price. Also eligible for replacement are about 14.3 million Sprint PCS options with an average exercise price of $52.54, or far higher than the current share price of PCS.
By doing things this way, Sprint avoids those hefty hits to the bottom line; a Sprint spokesman says the company will not record any charges for this, because technically it's not repricing.
Of course, unless FON stock skyrockets past $59 between and now and May, the net result is the same as a repricing, which could be why a few folks sound bitter today.
I'm not a huge fan of options repricing, but in this case, the company has a point.
Only a fool would deny Sprint's stock shot up last year because of the Worldcom (Nasdaq: WCOM) deal. FON shares collapsed following the government's bone-headed decision to kill the merger.
Sprint's tailspin was exacerbated by a combination of worries that the company would be left behind by multinational communications giants, fears about the long-distance market in general and concerns stemming from Wall Street's overall malaise in recent months.
The company can't do anything about any of those macrotrends. In fact, Sprint's business seems to have held up reasonably well over the last 12 months despite growing competition and the merger distractions.
Thus, there's no reason to let employees suffer for the stock's rotten performance. It's especially important these days, when experienced talent is at a premium.
And keep in mind that this options rejiggering is for employees only. CEO Bill Esrey, COO Ronald LeMay and the rest of Sprint's board are not taking part in the plan announced today, and they shouldn't. After all, shareholder value is their responsibility ultimately and they haven't delivered.
Yet you can't reasonably fault Sprint for trying to keep its workforce happy, especially with experienced workers in high demand as the communications industry expands. The options replacement costs nothing on the books, while providing a little more incentive for employees to hang around. It's not much to complain about.
There's always the danger of starting a trend that encourages lousy companies to play options switcheroo. But a truly bad firm won't be around much longer in this market anyway. 22GO>