October 31, 2008


How companies can exploit current market situation.

The current stock market situation is unprecedented. Indian stock markets have never fallen this much from the peak. The BSE 500 index, which presents a more realistic picture than the 30-stock Sensex, has fallen 60% from its peak and at its recent bottom it fell as much as 70%. If observed closely, the sample space is filled with stocks which have lost 70-80% of their peak value.

Companies can remain indifferent from the stock market gyrations if they don't have to raise money from capital markets. But, in the growth economy like ours companies are constantly in expansion mode. The ones in a hurry do it aggressively. Since the taps of fund raising have dried, there is very little they can do.

Many of the promoters feel their stocks have been beaten down to unreasonable levels. These are clearly very depressing times for them. Now, how can they exploit this situation?

Three ways.

One. Buy back the shares from market. But, this applies to companies which are rolling in cash. And not many fit the bill. The companies will rather conserve cash for the tough times ahead than spending it on "unnecessary" buy-back.

Two. Buy other companies. Then again, this for companies with cash can afford this luxury. The India's most admired IT company comes to my mind which is sitting on some Rs 8000 Cr cash.

Here is the third and final way. And it applies to all the companies including those rolling in cash and those who have raised billions of dollars in debt. Award stock options to employees. And do it liberally. Keep the vesting schedule to 4 years (or more if allowed by regulation) with one year cliff. That is, if an employee is awarded 100 options with 4 year vesting period, then first 25 options are vested at the end of first year. And then the remaining options can vest on monthly basis.

It locks employees for at least 4 years. There is very little downside on stock prices (I shouldn't say that as theoretically the lowest price for stocks is zero.) So, after some time the stocks will always trade above the strike price. This is a tax-efficient reward as long-term capital gains are taxed at zero percent rate. If employees want to leave before vesting completion, they will leave serious money on table. When the good times return, salaries need not rise again to stratospheric levels if the compensation from stock options is tidy. The company need not worry about either attrition or wage inflation. This also aligns interests of promoters and employees nicely.

Now, is there anything obvious I missed out?

ufff man!!
you are brilliant!!
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