There's a One-of-a-Kind Sale on Microsoft

J.P. Morgan's plan to buy back options may cause some short-term volatility.
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upcoming sale of out-of-the-money employee stock options to J.P. Morgan Chase could decrease the company's stock price in coming days, the software maker has warned in a filing with the

Securities and Exchange Commission


But other than moving large transactions across the ticker tape, the options sale should have little impact on the stock, analysts say. And longer term, the options sale could be good for Microsoft investors because it could result in less dilution than if the options remained in employees' hands.

Under the one-of-a-kind options sale, Microsoft is allowing employees to sell options that have an exercise price of at least $33 a share and that expire on or after Feb. 29, 2004. Shares of Microsoft closed down 10 cents, or 0.4%, at $26 on Monday.

Microsoft has estimated that 37,000 employees, who hold 624 million options, are eligible for the program. The amount they will be paid for their options will be based on the exercise price and the average of Microsoft's closing price over a 15-day so-called averaging period. That period would begin no later than Nov. 17, assuming that the deadline for employees to decide whether to participate is not postponed from its current date, which is Wednesday, according to a Microsoft spokesperson.

Options with an exercise price of $33 were expected to be sold for about $2, while those with an exercise price of $45 could be sold for 25 cents, according to an email CEO Steve Ballmer sent to employees July 8, when the company's stock closed at $27.70.

Under the plan, J.P. Morgan also will reduce the term of options with expirations of more than three years to three years for most and two years for certain ones. A shorter term reduces the chance of the options being exercised because there's less time for the stock to reach the point to make them in-the-money.

That's good for investors because it also means less dilution, noted Sanford C. Bernstein analyst Charlie Di Bona, who has an outperform rating on Microsoft. His firm doesn't do investment banking but its parent company, Alliance Capital, holds Microsoft shares.

Meanwhile, during the averaging period, J.P. Morgan will sell shares of Microsoft short to hedge its exposure from holding the options. "These sales could have the effect of decreasing the market price of our common stock," Microsoft wrote in an SEC filing.

Goldman Sachs analyst Rick Sherlund estimated that as many as 150 million to 200 million shares would have to be shorted over the 15-day period, though it would probably be lower because not all employees are likely to sell their options. He has an outperform rating on Microsoft and his firm has done banking with the company.

Although the option sale is unprecedented, Citigroup Smith Barney analyst Tom Berquist said he believes it shouldn't have any lingering impact on the company's stock price.

"We think it is entirely possible that we will see several multimillion-share blocks of MSFT stock cross the tape that have little impact on the actual movement of MSFT shares," Berquist wrote in a research note in September. (Berquist has a buy rating on Microsoft and his firm has done banking with the company.)