Exchange Program Buoys Underwater Options
Stephanie A. Weiss
New Focus Inc. is the latest photonics company to offer its employees an opportunity to trade in last year's stock options for shiny new ones that reflect the recent downturn in the securities markets.
Our Photonics Job & Salary Survey indicated that 20 percent of people employed in photonics received stock options last year, when the stock market drove prices of light-based technology shares to amazing heights. Options usually allow an employee to buy shares of company stock at a substantial discount.
More recent market conditions have dropped many photonics stock prices below employees' option prices. A January survey by iQuantic Inc. of San Francisco said that some portion of stock options are "underwater" at 80 percent of companies, and that at least half of the options are underwater for at least one-third of those companies. The market has rebounded since then, but photonics issues remain well below their 2000 heights.
Companies have several possible ways to respond to the situation: Ignore it and risk the departure of employees who consider the options to be an important part of their salary and benefits package. Reprice the options, which carries undesirable financial reporting requirements. Grant more options, which dilutes the value of each share. Exchange the options, which avoids financial reporting headaches without offering new shares.
The New Focus offer, like others, allows employees to trade in their underwater options for a promise of replacements at a future date. The company will base the exercise price on the company's stock price on the day before the grant.
For employees, the only question is: Will my company's stock price exceed my current option price before the replacement date?
For those who received options around the time that New Focus hit its 52-week high of $165.12, current market conditions suggest that the trade-in program will be a very popular ... option.
MORE FROM PHOTONICS MEDIA