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Stock Options Were Windfall for Google Workers

Friday, 18 Dec 2009 01:06 PM

 

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Google's employees couldn't have timed the stock market's turn any better.

A day before stocks bottomed in March, Google Inc. let almost 16,000 of its workers exchange their stock options. It turned out to be the deal of a lifetime.

The average exercise price for the options held by non-executives was around $521 a share at that time. But Google's shares were trading closer to $308 each, making the options all but worthless. So, Google repriced the options to where its stock closed on March 6.

Then something surprising happened. Like the broader market, Google's shares began to soar. Now, the stock is around $590, and each option has a profit of roughly $280. That amounts to a potential windfall for employees at the Internet search company of more than $2 billion.

What happened at Google illustrates the extremes of 2009 — lots of losers became winners, an unexpected outcome for a year that started deep in the doldrums.

The worst decline in stocks since the Great Depression turned into the biggest rally since that time. A lifeless economy showed signs of life again. Even banks that took billions of dollars in federal money to survive were able to pay back that money by the end of the year.

This turn of events is putting cash back into Americans' wallets. Net worth — the value of assets like homes, bank accounts and investments — is rising, up 5 percent to $53.4 trillion in the most recent quarter. That's the second straight quarterly increase after six quarters of steep declines.

"The opposite of despair is elation," said Kent Engelke, chief economic strategist at Capitol Securities Management in Glen Allen, Va. "We faced panic and fear at the start of the year. We thought we were on the edge of the abyss. Now, we've backed off from that."

Google's decision to alter its options program reflected how the bear market that began in October 2007 went from bad to worse in early 2009. The Standard & Poor's 500 index plunged another 25 percent from Jan. 2 to March 9, adding to the more than 40 percent it had already lost since the market peak.

Google's shares had tumbled to $282 by mid-January from a record topping $747 in November 2007.

Almost all Google employees receive at least some of their compensation in stock options. That meant the market's plunge greatly affected morale at the company's Mountain View, Calif., campus, where employee perks include free gourmet food, on-site massage therapy and car washes.

When stock prices rise, options can be lucrative. Every option is given an "exercise" price when granted, reflecting the amount that employees can buy shares at a later date. That is usually the price of the company's stock when the option was granted.

The benefit of stock options falls apart when share prices decline, because the exercise price is higher than the current stock price. When options are considered "under water," they offer no value to employees because they can't cash them in for a profit.

Some 85 percent of Google employees had a portion of their options under water when the company announced plans on Jan. 22 for the option exchange program.

Google CEO Eric Schmidt acknowledged then that the recession had put the company into "uncharted territory." The company was still profitable, but its earnings had tumbled 68 percent in the last quarter of 2008. That was the first time it had seen an earnings decline since becoming a public company in August 2004.

On Friday, March 6, Google repriced 7.64 million options belonging to non-executive employees to $308.57 each, its closing share price that day. The stock would slide slightly lower on March 9, but then begin a dramatic climb.

The company declined comment on the gains seen since the option price exchange.

The S&P 500 has followed a similar pattern, climbing more than 60 percent since the second week in March. The market's gains have added $5.1 trillion to U.S. household wealth, nearly half of what was lost during the market's downturn, according to Citigroup estimates.

Besides Google, 15 other companies also repriced options during the first nine weeks of the year. Ten of those 16 have seen dramatic gains in their stocks since, according to compensation research firm Equilar Inc.

Any windfall from the repriced options may only last as long as Wall Street's rally does. Many companies that reprice options require recipients to wait before the options vest or can be exercised. Google added a year on to its vesting schedule and six months on to the period before the options could be exercised.

As the economy improves, the cheap and plentiful money that has fueled the market's rally could begin to disappear. The U.S. government has spent nearly $1 trillion to stimulate the economy and the Federal Reserve has maintained a policy of keeping interest rates near zero.

The last year was full of extreme conditions for the stock market, but it ended with a huge finish. The wins won't be as easy in 2010.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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