Intel Option Exchange considerations
Sep 29th, 2009 by Tim
If you are an Intel employee, you should find this post informative.
Earlier this year Intel shareholders approved a Company proposal to exchange underwater employee options for new options at a lower strike price. Unlike Google, who granted their employees a 1 to 1 exchange with perfect timing, the Intel options exchange is designed to be a “value for value” exchange. Intel updated the Tender Offer documents today to include the preliminary exchange ratios, which are shown below.
|
Grant Year |
Exercise Price of Eligible Options |
Preliminary Exchange Ratio as of September 25, 2009 | |
| 2000 (beginning | 32.00 to 37.99 | 45.7-to-1 | |
| October 1) | 38.00 to 40.99 | 106.4-to-1 | |
| 43.00 to 43.99 | 220.8-to-1 | ||
| 2001 | 21.00 to 21.99 | 2.0-to-1 | |
| 24.00 to 24.99 | 3.5-to-1 | ||
| 25.00 to 25.99 | 4.5-to-1 | ||
| 28.00 to 31.99 | 9.2-to-1 | ||
| 32.00 to 34.99 | 21.7-to-1 | ||
| 2002 | 20.35 to 21.99 | 1.6-to-1 | |
| 28.00 to 30.99 | 4.5-to-1 | ||
| 32.00 to 35.99 | 8.2-to-1 | ||
| 2003 | 20.35 to 24.99 | 1.7-to-1 | |
| 31.00 to 31.99 | 2.7-to-1 | ||
| 2004 | 20.35 to 20.99 | 1.8-to-1 | |
| 23.00 to 23.99 | 2.7-to-1 | ||
| 26.00 to 27.99 | 1.8-to-1 | ||
| 32.00 to 33.99 | 2.7-to-1 | ||
| 2005 | 22.00 to 23.99 | 2.1-to-1 | |
| 27.00 to 27.99 | 2.8-to-1 | ||
| 2006 | 20.35 to 20.99 | 1.3-to-1 | |
| 22.00 to 22.99 | 1.6-to-1 | ||
| 2007 | 20.35 to 21.99 | 1.2-to-1 | |
| 25.00 to 26.99 | 1.6-to-1 | ||
| 2008 (ending September 28) | 21.00 to 22.99 | 1.2-to-1 | |
Intel has provided an online tool (My Option Exchange) to model different scenarios and decide, on per-grant basis, to accept or reject the Exchange. The tool has a modeling feature that allows you to use different assumptions about Intel’s stock price growth. The tool will show the “cross-over point.” It’s the point at which your current options would be worth more than the new options.
Source: sec.gov
Decision Factors
The employee presentation states that the decision factors include:
- Current Grants – Understand the details of your current grants (# of options, grant price, expiration date)
- New Grant – Terms of new grant (4 year vesting, expire 7 years from grant date, exchange ratio)
- Stock Price Growth – expectations for the future value stock price
- Value – potential option future value
Let’s include several more decision factors:
- Tenure – how long do you expect to remain employed at Intel? What is your view of your job and organization future prospects?
- Retirement – do you plan to retire within the next 2 to 7 years? Are you eligible for Rule of 75? If so, special considerations apply.
- Risk tolerance – what is your appetite for risk? Would you rather have an increased likelihood of a moderate gain or the current likelihood of a larger gain? How would you feel if your current option(s) expired worthless when the new option would have provided a gain?
- Cash flow – do you have a high priority need for extra taxable income or can you afford to treat the options as variable income?
The Bottom Line
The key variables in the analysis are your forecast of the annual stock price growth rate and your risk tolerance. History is not a useful guide since the 10 year historical stock price trend is declining. A reasonable assumption is that Intel future stock growth will be in line with other domestic large cap growth companies. Semiconductor companies have historically had cyclical growth, with stock price swings larger than the broad market. Beta, a measure of volatility of a stock relative to the broad stock market, is currently 1.2 for Intel. For example, if your large cap growth asset class forecast is 9%, then the Intel forecast is 9% * 1.2 = 10.8%. You will get significantly different projections based on changes on the assumed growth rate, and the sensitivity of the crossover point to changes in the growth rate will vary by stock grant.
The decreased time value of older grants that are closer to expiration is reflected in the higher exchange ratio than for new grants at a similar exercise price. Since you can exchange on a per-grant basis, you can keep some of the existing grants to capture a portion of the upside potential if you are a “true believer” in significant expected future growth.
One more thing – the exchange ratios are preliminary and could change if there is a significant change in Intel stock price during the offer period. Earnings are announced on October 13, during the offer period. Be sure to re-visit your decision after the final exchange ratios are announced about 10 days before the exchange window closes.
Excellent points about additional decision factors. The “My Option Exchange” tools are pretty slick, but they don’t address whether the assumptions that go into the calculations are reasonable. Also a good point that for Intel to begin tracking the U.S. Large Cap Growth asset class, it will need to break out of a secular downtrend that has been in place and extremely consistent since 2001. There may be a catalyst that breaks the stock out of its doldrums, but Intel employees should definitely consider what that may be.