Underwater Option Exchanges: Managing the Risk of Incremental Cost

This Equity Compensation Issue Brief reviews a common concern regarding the risk that share price changes during the tender offer period on a stock option exchange may cause what was initially represented to shareholders and management as a “value-for-value” exchange to actually give rise to incremental cost. Indeed, because most companies implementing an option exchange have a high volatility, it is plausible that [downward] share price movementsduring the tender offer period could give rise to a material amount of incremental cost. This risk arises from the fact that exchange rations are usually locked down prior to the tender offer while incremental cost is measured after the tender offer.

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