Yahoo’s new severance/retention plan is the envy of every employee on earth (details here). So how much will it cost an acquirer? At least $1 billion and possibly as much as $3 billion.
The most expensive aspects of the severance plan are the full salary and benefits for up to two years and the acceleration of stock and option vesting. Let’s take them each individually:
Stock and options:
At the end of 2006 (last figures available), Yahoo had 190 million stock options outstanding–approximately 15% of the overall share base–with an average exercise price of $29 a share. Of these, approximately 100 million were “in the money.”
The company estimated the value of these options (to the employees who owned them) at $730 million. From an acquirers’ perspective, however, they are far more expensive, as they represent immediate dilution if they become exercisable upon the close of the deal. If 100 million options are in the money and immediately exercisable, this would represent 7% dilution. At $30 a share, these 100 million new shares would add an additional $1-$2 billion to the company’s price tag.
(The exact amount would depend on the average exercise price of the in-the-money options. The out-of-the-money options would also likely have some value).
Yahoo also had 12 million unvested shares of restricted stock outstanding at December 31, 2006, which would represent additional dilution.
The 24-month full salary + benefits deal applies only to senior executives. Let’s assume, however, that the average severance period will be 1 year. Let’s further assume that about 1/2 of Yahoo’s $6 billion annual cost base is compensation ($3 billion) and that Microsoft will fire 1/4 of Yahoo’s staff. This would result in a one-time cash severance payment of about $750 million.
Add the stock and cash charges together, and you’re looking at additional cost of $1-$3 billion. Much of this will disappear in a one-time charge, of course, so Wall Street will ignore it, but it’s real money–even for Microsoft.
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