MGM MIRAGE options prompt debate

David Strow

Thursday, Nov. 15, 2001 | 10:37 a.m.

MGM MIRAGE is offering its top managers a chance to start over again -- with their stock options.

On Tuesday MGM MIRAGE offered 400 of its executives, directors and managers an opportunity to reprice millions of stock options. MGM MIRAGE calls the plan a method of increasing shareholder value by providing executives with more attractive incentives -- something it says is critical to retention.

"We know this has been a difficult period for you personally ... (this plan shows) MGM MIRAGE's support for your continuing efforts," MGM MIRAGE Chairman Terry Lanni said in a letter to affected executives.

Such a plan will be dilutive to MGM MIRAGE's future earnings, Bear Stearns gaming analyst Jason Ader said -- though he added he believed such a plan was probably a good idea in the long run.

"There's positives and negatives, but in the end, the positives outweigh the negatives," Ader said. "Yes, it's dilutive to earnings for existing shareholders, but in the end, existing shareholders benefit from low turnover of key employees. It's far more expensive for a company to lose its leadership ... because of attrition associated with stock options way out of the money."

Some, however, aren't as accepting of MGM MIRAGE's plans.

"If I bought some stock at $30, and the stock drops to $20, do I get to reprice my purchase too?" said Dave Ehlers, chairman of Las Vegas Investment Advisors. "Will they send me a check for the difference?"

Following a post-Sept. 11 plunge in the company's stock price, millions of MGM MIRAGE stock options were left far "underwater": that is, with exercise prices well above the market price for MGM MIRAGE stock.

Stock options only have value if they allow an executive to acquire shares at prices below the market price. Typically shares acquired with options are immediately sold back into the market, with the exerciser pocketing the difference between exercise price and market price.

Options make up a large component of executive compensation, and are intended to provide executives with a direct financial incentive to increase their company's stock price.

MGM MIRAGE stock now trades around $25.35 per share; MGM MIRAGE spokesman Alan Feldman said the average option exercise price was $24.22 in December 2000. Most of the options granted in 2000, at least to MGM MIRAGE's top executives, gave executives the right to buy shares at prices ranging from $32.50 to $34 per share.

To correct this, MGM MIRAGE is offering the executives the opportunity to exchange any options with an exercise price of $23 or above for new options. The new options would be issued next June or July, and their exercise price would be the market price of MGM MIRAGE stock on that day.

The downside -- executives will only receive nine options for every 10 they exchange. If MGM MIRAGE stock soared in the next six months, those participating would be hit with a double whammy -- fewer options with a higher exercise price.

"There's no guarantee this will work to the employees' advantage," Feldman said.

Nearly 11 million MGM MIRAGE stock options -- a majority of those outstanding -- are eligible to be swapped.

It certainly isn't a unique plan, Ehlers said -- it's been done "thousands of times before," usually after severe drops in stock prices, he said.

But it's something he believes should enrage shareholders.

"I see the effort to reprice options as a wedge, so that selected officers and directors can get stock at a lesser price to the disadvantage of those who paid more prior to the Sept. 11 event," Ehlers said. "If I owned any stock in MGM, which I don't, I would sell it."

Feldman responded that the ultimate goal of the plan was to increase shareholder value.

"The simple fact of the matter is that this (stock options) is a strategic part of our employment program, and in order to secure the future of our company and maintain the wonderful group of managers we have, this is an important part of staying competitive (with executive pay)," Feldman said. "Ultimately the way we will maintain and enhance shareholder value is through the stability of our management team."