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Did MagicJack Really Do That?

May 30th, 2012 by · 2 Comments

Disruptive force that it has always been, magicJack VocalTec (NASDAQ:CALL, news, filings) has never been much for the conventional way of doing business, but in the first quarter it seems they really out-did themselves. Check out this Wall Street Journal piece from last night.  Apparently 20% of their earnings per share came from selling put options on their own stock, betting against their own stock going down. In and of itself this sounds like something out of the dotcom years, but there’s another aspect to this that the WSJ didn’t happen to mention.

Of course, it could have been worse if the stock had gone down and they had the shares ‘put’ to them, that goes without saying.  But if it had been a more ordinary buyback strategy they would have bought the stock already at an even higher price and lost even more under that scenario.  So this risk was not a random option bet in the sense that the WSJ is reporting.  But that’s not what I mean either.

If you’ll remember, MagicJack was very vocal about its results early on. They pre-announced they would beat analyst estimates in February, and then pre-announced again after Easter that they had actually done so. The fact that at the same time they were selling out-of-the-money puts as part of their stock buyback program while doing so adds a substantial amount of color on that early pre-announcement.

Given the bet they had made, letting people know early how well things were going sort of made it less likely the stock would go down on worries they wouldn’t.  So when the WSJ mentions how badly their bet could have gone, it seems like MagicJack wasn’t exactly shooting in the dark.

Makes you wonder, can they really do that?  In effect, they played the street in a way that I haven’t seen done so well since Cogent sold a bundle of bonds they didn’t need to sell before the 2008 credit freeze and bought half of them back at less than half price a few quarters later.

 

Categories: Financials · VoIP

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2 Comments So Far


  • Crossy says:

    FWIW … Rob … selling PUT options on your own stock is a corporate finance manoever that Intel did a lot of times – selling LEAP puts since the late 1990ies. It may look as if you “bet against your stock going down” but there’s more to it, especially if the number of contracts written roughly equates the number of stock options awarded or exercised.

    Does this ring a bell ? In this way, a firm can keep the number of outstanding shares constant and during the late 1990ies, they could even reduced their tax burden as employee options did reduce a firm’s corporate tax burden. Not sure about the current treatment but there still might be an advantage attached to this strategy.

    Actually it’s a win-win strategy for a company treasury or CFO to write PUT options to do stock buybacks instead of purchasing shares on the market in discrete transactions, especially during times of high volatility. In this way, the firm can either collect the option premium and alternatively have defined the amount of dollars spent for repurchasing. Good from a risk-management point of view I guess.

    rgrds
    CROSSY

  • Patrick says:

    Is this strategy using insider corporate knowledge to profit on the open market?

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