Are executives cashing out?

Follow the money, the old saying goes, and youll make intelligent investing decisions. But what happens when the money is pulling out?

Several news articles have suggested that corporate executives arent as worried about stock prices as the average investor. In fact, many have been buying large blocks of company stock.

But their actions arent what they seem to be. I recently studied the stock-trading behavior of executives at roughly 200 major companies and found a disturbing trend: Indeed, executives are buying large amounts of stock. But they are exercising options in order to acquire them. In the overwhelming majority of cases, they are immediately selling these shares, in many cases locking in a multi-million dollar profit.

Nothing forces an insider to hold onto shares obtained through options. Oftentimes, they lack enough money to buy all of the shares outright and must sell some to raise money to retain the others. But the pattern seen recently, of executives exercising options and immediately selling all shares, raises questions about their confidence in the stock. On a number of occasions, systematic selling of stocks gained via options coincided with peaks in price.

For example, Intels senior vice president, Albert Yu, exercised 213,324 options earlier this year at prices averaging $1.84 per share. He promptly sold 193,324 of the shares at prices averaging around $63 per share, yielding a pretax profit of $11.8 million. Chief Financial Officer Andy Bryant sold 88,000 shares two days after exercising options that gave him a $50 per-share profit.

Lucent Technologies director Henry Schacht displayed impeccable timing in selling shares last year. Schacht exercised 500,000 options last July at an average pre-split price of $22.28 per share, then immediately sold the 500,000 shares for around $92. This sale occurred right before Lucents stock dropped 50%. One week later, executive vice-president Patricia Russo exercised 32,356 options and promptly sold it all for profits averaging $67 per share

Two PepsiCo insiders, Senior Vice President Sean Orr and executive Craig Weatherup, exercised 245,741 options February 4 and May 17 and sold all their shares the day they acquired them. Both were able to reap profits of more than $30 per share.

AlliedSignal insiders were frequent and heavy sellers of stock earlier this year. In the second half of April, several executives collectively exercised several hundred thousand options and immediately sold all the shares they acquired. Ironically, they missed the subsequent rally in the stock.

A few executives have held on to the stock gained via options. By and large, they are CEOs who seemingly didnt need the money. Their decisions seem noteworthy because, in certain cases, other officers at the company were selling shares at around the same time.

Walt Disneys CEO, Michael Eisner, exercised nearly 2 million options January 7 at an average price of around $6 per share. The stock traded at the time for $31.75, giving Eisner a $51.5 million paper profit. Eisner has held his stock. Since that time, two other Disney executives, Sanford Litvack and John Cooke, exercised 960,000 options and promptly sold their shares.

Abbott Laboratories chairman, Duane Burnham, has exercised 1,156,888 options since January 28 at an average price of about $31. Burnham has not sold any of these shares. Several other officers and directors at Abbott have exercised options since the beginning of the year and have held their shares as well. Philip Morris CEO, Geoffrey Bible, exercised 477,000 options in 1998 but has yet to sell any shares.

Sanford Weill, the chairman of Citigroup exercised options for 3.97 million shares on April 14 at a price averaging $58 per share. The same week that Weill exercised and kept his shares, Citigroup officer Robert Lipp exercised 345,486 options and sold 300,000 of the shares.

But these executives have been the exception rather than the norm. Holding onto company stock when prices are in the stratosphere may hold too much risk for many senior managers. That is, unless the company has dangled a nice carrot in front of you to pump the stock higher, as was the case with Mattels CEO Jill Barad.

In 1997, Barad took out a $4.2 million loan from the company to buy 293,000 shares of stock for her personal account. The loan agreement says that if Barad can get Mattels stock above $45 per share for 20 consecutive days by next May, the company will forgive the loan.

http://www.tvinvestor.com/commentaries/jun25.htm

-- andy (2000EOD@prodigy.net), September 04, 1999

Answers

I see this article appeared on June 25th. It would be interesting to know if the rat jumping activity has stepped up!

-- King of Spain (madrid@aol.com), September 04, 1999.

Andy,

Unless you can point out that this year is any different than past years whats the point? Rats have been doing this for many years. I recall rats doing this a Disney and MCI last year(or sometime near that) for very big bucks.

-- y2k dave (xsdaa111@hotmail.com), September 05, 1999.

I can recall a few threads recently on just this topic - I feel it is increasing - Linkmeister - where are you :)

-- andy (2000EOD@prodigy.net), September 05, 1999.

Personally, if I had such excellent options available to me I would be doing exactly the same thing right now. Many folks at the higher levels of management, where the options are, believe the stock market is a bubble. Time to take profits. What do you think all those "rushed" bond offers are all about? Corporate USA is contingency planning for both a stock crash and Y2k economic disorder.

-- Gordon (gpconnolly@aol.com), September 05, 1999.