Stock options are intended to align the interests of management with those of shareholders. As we’ve previously discussed, however, they don’t always work like that. Nowhere is this more clear than at Acorn (ATV), an infomercial marketer. Acorn trades for $100 million, but holds $140 million in cash.
Shareholders are imploring management to pay that cash out, as last quarter’s conference call contained the following statements:
“…[W]hy not consider a special dividend to shareholders and for this reason, when I look at the Shanghai Composite Index, year-to-date, it is up 55%, the Hang Seng China Equity Index is up 46% and your stock is up less than 1% this year…I would highly encourage you to consider a special dividend.”
“I’d like to also support the thought of a one-time cash dividend, which would distribute your overcapitalized cash for the benefit of all shareholders without impairing your trading volume. You may recall, I mentioned that in our meeting back in July.”
Management assured these shareholders that they will consider these suggestions. But upon closer inspection, it is clear to see why management would be so hesitant to pay out: there are almost 15 million options outstanding, while the company only has 87 million shares outstanding. If a one-time dividend were to be paid, option holders would get nothing, and their claim on the company would be much lower in two respects:
1) It is less likely that the company’s share price would exceed a given option’s exercise price, thus reducing the number of options that may be exercised and,
2) Each exercised option will also be worth less, since there will be less cash on the balance sheet than otherwise
But while management does own a significant stake in the company, they do not control it. As such, the rumblings of these small shareholders might win out in the end, forcing management to eat options they would prefer to exercise.
Disclosure: Author has a long position in shares of ATV
