Author Archive - Kew Kelly Yuo
Looking at the Fine Print of Gooptions
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Written By Kew Kelly-Yuoh | December 14, 2006 | Share This
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Big news for Google employees - thanks to a new TSO program dubbed “Gooptions“, employees can now sell vested stock options to high bidding financial institutions. From the Google blog: “Employees will still have the choice of simply exercising and then holding or selling the stock too. But if they choose to sell the options, they can use a simple online tool that will show them the best price a participating financial institution is willing to pay for their vested options in real time.” Read this CNET post for a more detailed explanation.
Initially hailed as an innovative HR strategy, then called “good for investors“, the option plan has received so much praise that Internet Outsider asks, “If anyone has figured out the drawbacks of Google’s new transferable option plan, please weigh in, because at first glance it looks like a win all around.” Though numerous ‘draw backs‘ have been suggested, including “an employee rush for exits”, “shareholder dilution” and “arrogance”, I’m surprised that no one has pointed out the most important nugget from plan’s fine print:
The term of an employee’s option goes to the LESSER of 2 years or the remaining term of the option. If your option is in-the-money, then yes, under the new program you can now capture the intrinsic value plus time value, no brainer, it’s been written about exhaustively by the enslaved Google PR horde. If your option is underwater, however, it’s a different story - You’re left with only the time value, and the key question is, “How does that time value change when I’m selling a 9 year term option to an I-bank that is pricing it with a 2 year term (and trying to screw me every which way to Sunday)?”
Assume Google is trading at $480, strike is at $480, annualized volatility of about 35% and risk free rate around 4.5 - 4.7% (good thing the yield curve is pretty flat between 2 and 10 years). You run a Black-Scholes with these inputs for a 9 year term vs. a 2 year term option, and discover that the time value of the 9 yr term is about 2.2x the 2 yr term option. In fact, that ratio increases as the price falls further below strike. In other words, the more the strike price falls, the more employee gives up when he/she sells the option.
Employees should at the very least wait until their underwater option has a 2 year term left before selling it. This way they a) don’t take the time value hit, and b) maximize chances that intrinsic value increases above zero during the next 7 years (in our hypothetical example). Or, maybe the Google employee decides to cash out the 9 year term option, bank on getting a 200% return over the next seven years, break even on the time value side, and ignore intrinsic value.
But the real issue is - did any Google employees really follow what I just wrote? Can the bally-hooed employee base with their “withering intellect” make the leap to the finance world? Do any of them really care about the fine print?
I propose that the new plan is less an incentive for HR than it is a plug for PR. In that sense, maybe it is a “win” all around.
Kew Score: There’s More to Google’s Q3 than Champagne and Roses
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Written By Kew Kelly-Yuoh | October 20, 2006 | Share This
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Well it wouldn’t be fair if I just harped on Yahoo!, now would it? Looks like Google had another blow out quarter, champagne and roses for all, investors and analysts are ecstatic, what else is new? Well for one, Google’s tactical business model. When headlines trumpet Google’s company-owned sites drive revenues, Google’s competitors and especially its distribution partners (hello MySpace???) should really start paying attention.
I’m talking about the economics behind Google’s traffic distribution model. First, Google attracts advertising partners with a serious amount of upfront cash, but stipulates that partners have to “earn” that cash over a set amount of years (subject to various and sundry traffic and CTR thresholds, etc). In the meantime, Google develops a competing product and uses it to slowly (or quickly) siphon off the precious search/contextual traffic from its distribution partner. Finally, Google sends that traffic to its own properties. It’s tremendous growth, then, is a combination of strength of the overall paid search market plus a more than doubling of revenues per click (since Google no longer has to share the CPC with anyone) for each click it siphons off a partner to its own property. In fact, for each siphoned click, especially in its core search service, that incremental revenue probably falls straight to the bottom line. Beautiful business economics and execution — just ask Yahoo! or Lycos. More interestingly, check out Google in the Asian markets where their brand doesn’t get them that far.
Which brings me to YouTube and MySpace. Google likely bought YouTube because:
- Google couldn’t approach YouTube with its tactical business model outlined above –since even almighty Google can’t currently monetize video effectively, and
- Why not buy YouTube from a defensive perspective before Yahoo! does, and figure it out all later? (Besides it’s a stock deal and what’s the worst that can happen?)
I hope MySpace has the werewithal to start building out a PPC platform (or at least buying a Tier II/III PPC engine that’s managed to sidestep Yahoo!’s patents in this space), because the Google army will be spending the next 3 years building out and improving monetization of YouTube to siphon away their video traffic. Facial recognition, AI and other esoteric technologies (that no media company can employ) are all in the works from Google as they race to properly contextualize and index video. Next up — social media monetization, self-perpetuating growth, and of course, more champagne and roses.
Yahoo! to Build Bigger Bomb Shelter
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Written By Kew Kelly-Yuoh | October 17, 2006 | Share This
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You’d think the sky was falling given some of the headlines surrounding Yahoo!’s latest earnings release. From Marketwatch.com, “Yahoo profit falls 37%; net sales up 20%” and from MercuryNews.com “Yahoo earnings off 35%, but meet estimates.” It is, of course, flavor of the month to rag on Yahoo! given perceived sluggishness in getting anything done, but leading with this quarter’s earnings decline really is meaningless given that:
- Yahoo! preannounced all the information anyway and
- Yahoo! is using different accounting methods for expensing options this quarter vs. the quarter a year ago.
Restating the latter point, if you’re going to calculate a percentage delta, i.e. X/Y-1, and X and Y are apples to oranges, what’s the point?
Which brings me to one of my pet peeves, the concept of expensing options using the fair value method or Black-Scholes, probably the biggest load of crap accounting calculation forced upon companies post Enron by people who know next to nothing about statistics. Black-Scholes is incredibly sensitive to the volatility input, which is, not only, notoriously difficult to validate (as opposed to the actual calculation which is simple), but it assumes price deltas are distributed normally. Of course, price deltas are not distributed normally, and thus volatility (particularly for a stock such as Yahoo!) doesn’t even converge to a value over any period of time.
But lest we go down that rabbit hole too deeply, reading through Yahoo!’s earnings release the biggest concern is actually the Company’s $3 billion stock repurchase program. Yes, there are various caveats as to when Yahoo! will buy its stock back, e.g. five year timeframe, market conditions, share price and other factors, but Yahoo! is essentially saying its stock is a better investment for $3 billion of the Company’s hard earned cash than anything else out there including new business initiatives, acquisitions, strategic partnerships, etc. A stock repurchase is something I expect from a mature company, not Yahoo! who is in the throes of competing with Google amidst the ballyhooed Web 2.0 explosion. Seems Yahoo! is focusing too much on the ticker tape and not on executing quickly, maybe they should invest $3 billion on getting Panama out the door.