Mandalay CEO’s stock sales confound observer

Graef Crystal

Thursday, June 17, 2004 | 10:57 a.m.

What in the world is going on with Michael Ensign?

Between April 28, 2003, and this past April 8, the chief executive of the Las Vegas-based Mandalay Resort Group, which late Tuesday accepted a $7.9 billion takeover offer from rival MGM MIRAGE, has:

Then, on April 9, his board gave him 405,000 free shares worth $24.7 million on the day they were granted and $27.5 million at Tuesday's close.

Let's start with the share sales. According to Washington Service, which reports on insider transactions, there were approximately 20 of them between June 17, 2003, and this past Jan. 13. In all, 5 million shares were sold, at a weighted average sales price of about $36.50 a share.

That gave Ensign approximately $183 million before paying taxes on the gains. He could have made a lot more money if he had waited -- about $340 million as of Tuesday's close. Talk about bad timing.

As to his option shares, Ensign exercised and sold 2.1 million of them during the fiscal year ended this past Jan. 31, for gains of $43.7 million.

That left him with only 333,334 shares, which he exercised on this past March 9 for a gain of $11.6 million.

What's curious about the option exercises is how early they occurred. One million of his shares weren't set to expire until February 2009, another million were to expire in February 2011 and the most recent grant covering 400,000 shares was to expire in October 2011.

Once again, Ensign mistimed the market. The weighted average price on the date of his option exercises was $40.17 a share, way below Tuesday's close of $67.88 a share and MGM MIRAGE's latest offering price of $71 a share.

It's almost as if Ensign could hardly wait to exercise his options. As for that last tranche of 333,334 shares, the earliest date on which he could exercise those options was this past Feb. 28. His actual date of exercise was just nine days later.

By exercising so early, Ensign potentially left many millions on the table. Had he waited until the last day of the options' terms, his estimated likely gains at that time would have been $225 million. That compares with his actual gains of $55 million.

One reason for Ensign's share sales and premature option exercises might be that he's getting ready to pack it in. At the time the company's most recent proxy statement was filed on May 26, he was reported to be 66 years old. That reason, taken by itself, would not explain the award to him of 405,000 free shares.

On the other hand, those free shares could have been awarded to him in recognition of his grand past performance.

(Mandalay and Ensign have declined comment on the recent vigorous stock selling by Ensign and Vice Chairman William Richardson, other than to say the sales were for personal financial planning reasons).

Ensign became CEO on June 16, 1998. Between June 15, 1998, and this past June 3, the day before MGM MIRAGE made its tender offer, total return was 23.6 percent a year, a level that absolutely blew away the 2.1 percent annual return on the Standard & Poor's 500 Index. It also exceeded the 15.9 percent a year return produced by Harrah's Entertainment Inc. and the 21.4 percent a year return generated by MGM MIRAGE.

Total return for the year ended this past Jan. 31 was a whopping 86 percent. Once again, that was far higher than the 34.6 percent return on the S&P 500 Index, as well as the returns of 48.1 percent, 54.2 percent and 51.7 percent produced, respectively, by Harrah's, MGM Mirage and Caesars Entertainment Inc.

Looking at an even narrower time window, Mandalay reported that in the first quarter of the fiscal year ending Jan. 31, 2005, its basic earnings per share increased by 83 percent, while its diluted EPS increased by an even higher 88 percent.

Combine all that with the fact that until the grant of the 405,000 free shares, Ensign wasn't overpaid. According to a study of three-year average total compensation I did and wrote about on May 6, Ensign was paid only 5 percent more than what a CEO of a similarly sized company would earn. And given his truly fine performance, it could be argued that he was substantially underpaid.

From that perspective, the 405,000 free shares can be seen as a belated and overdue reward.

Of course, there's another explanation. That would be the desire of Ensign's board to at least partly bail him out for those dumb share sale decisions.

The members of Mandalay's board compensation committee are:

Graef Crystal

is an executive compensation columnist for Bloomberg News.