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Ariba, WebMethods plan option trade-in

In a bid to boost company morale, the two business-to-business software companies plan to allow employees to trade in currently worthless options for new ones.

In a bid to boost company morale, business-to-business software companies WebMethods and Ariba plan to allow employees to trade in currently worthless options for new ones.

The plans, approved by both companies' boards of directors, call for employees to cancel all their existing options in order to get new ones granted sometime in six months. The hope is that the new exercise price, which will be the closing market price on that date, will be far lower than the current exercise prices on options held by most employees.

The companies join a growing list of technology firms that have re-jiggered their option plans as stock prices plummet.

WebMethods announced its plan Thursday. Ariba released details of its option-exchange plan earlier this month in Securities and Exchange Commission filings.

WebMethods' plan applies to options that were granted on or before March 31, 2001 and have an exercise price of $40 or more.

The idea is to help employees of the companies who have seen options lose much of their value in the recent slumping market. Ideally, the exercise price, the price the employee pays to buy the stock, is lower than the stock's current market value, giving employees a nice bonus. But since the dot-com downturn, many of those options have been rendered worthless.

WebMethods' stock hasn't been above $40 since Feb. 28. The company announced last week that it would miss fourth-quarter earnings and sales expectations.

And Ariba, which has also warned of a missed quarter, has seen its stock plunge from a 52-week high of $173.50 to $27.94 on Feb. 8, the date the company initially offered the exchange program to its employees.

The companies are not re-pricing the options. Ariba said in a filing that it decided against that method due to a recent accounting rules change that would have required it to take a hit against earnings.

"If we were to simply reprice options, the company's potential for continued profitability would be in serious jeopardy, as we would be required to take a charge against earnings on any future appreciation of the repriced options," Ariba said in a notice to employees included in the SEC filing.

The companies are not the first to try such tactics. The accounting rules change in 1999 neatly coincided with the downturn in tech stocks, prompting many companies to look for ways to bolster their options plans.

iQuantic, a San Francisco-based consulting firm, surveyed 100 companies in November about their stock option plans. More than 80 percent of the companies surveyed said they had options underwater, and almost half of those said they had already done something to address the issue.

More, faster or repriced options?
The two most popular methods of dealing with the option plans have simply been to issue more options or speed up the rate at which options are given, said Patrick McGurn, vice president or director of corporate programs, Institutional Shareholder Services, proxy advisory firm.

Indeed, granting new options was the choice for 60 percent of the companies in the iQuantic survey that said they were considering taking action on the sinking options.

But some companies have simply bitten the bullet and repriced existing options, he said.

"That's popular with a dot-bomb or a company that's got serious problems," he said. "A key ingredient is that they don't have any earnings to dilute (with an accounting charge). It's more an act of desperation, or fundamental acceptance of some fundamental shift in the value of that security."

The newest trend is for what McGurn called the six-and-one plan. That is, have employees cancel their options, wait six months and one day to get around the accounting rule, then grant everyone new options.

On the positive side, an option exchange can help a company hang onto employees who may be disheartened by seeing their incentive program burn up along with the stock market.

But industry McGurn warned that it sends a dangerous message--both to shareholders and employees.

"The six-and-one is sending a strong message to the marketplace that 'this is a condemned property do not invest in this stock.' Employees actually have incentives to keep the stock down," he said. "You've used the incentive which is usually to get the stock up, to get the stock down. That's sending a very strange message to the marketplace about the confidence you have and you're your performance in the meantime."