Workers Tender Stock Options at Microsoft
(WSJ, 12 Dec 2003, p.C12)

By Jathon Sapsford

More than half of the Microsoft Corp. employees eligible for a closely watched stock-option program have decided to cash-out, under a plan sponsored by J.P. Morgan Chase & Co.

Microsoft's Initiative, first announced in July, is aimed at solving a problem facing many executives, especially in the technology industry, who have been paid in part with potions to buy stock in their employers. In many cases, those options ended up presenting little value after the industry's slump caused stock values to fall below the level at which the options could be converted to shares.

As part of a plan to revamp this emplolyee-compensation program, Microsoft announced in July that employhees would be able to cash in their stock options even if the strike price was above the level at which the stock was trading.

Microsoft said employees received from J.P. Morgan a total of $382 million for 345 million options, for an average of roughly $1.10 a share, though that average was based on a wide range of prices.

About 18,500 of Microsoft's 36,500 eligible employees - or about 51% - participated in the program, and most of those held options with a strike price above $33.00 a share, according to executives familiar with the matter. That compares with a Microsoft closing price on the Nasdaq Stock Market yesterday of $26.61.

J.P. Morgan is the first Wall Street firm to implement such a program, which only became possible after regulatory changes earlier this year. People familiar with the matter said that J.P. Morgan received a one-time fee of $10 million for setting up the program.

The bank, though, hopes that the real money from the deal will come from managing the rather large portfolio of Microsoft stock options it now holds. J.P. Morgan will hold those options until they expire, a move meant to keep the program from diluting the outstanding stock for Microsoft shareholders.

But J.P. Morgan will use them to create separate trading arrangements in Microsoft stock and related derivative products. Executives at other Wall Street firms have said that this business can be extremely lucrative for financial firms like J.P. Morgan that have desks of derivative traders making markets in the stock and the debt of companies like Microsoft and others.

Microsoft, meantime, haas found a way to offer its employees at least some compensation for their underwater stock options.