ESOARS: High Flyer or Donkey Flop? We'll Find out Soon Enough (ZION)

This week, we’ll see the launch of the first batch of ESOARS offered to the public. ESOARS stands for “Employee Stock Option Appreciation Rights Securities” and Zions Bancorp (ZION) is the first firm to offer these strange new securities.

(Strangely named securities too, these ESOARS? If they don’t work out for investors, you can be sure the nickname will be “Eyesores.” An even worse association: the childhood literary figure “Eeyore.”)

What are they? You probably noticed the article in the Wall Street Journal (sub. req.) describing them as “another stab at ‘public’ options.” It’s not a bad description. They’re essentially asset-backed securities that represent hoped-for cash payments from the exercise of employee stock options. That makes them all or nothing kind of securities: no exercise of options, no cash to be passed through to the security holders. So, the pricing of these things will be an exercise in option modeling. And they won’t be traded in any secondary market after the offering, so the offering will be a pretty critical measure of the value of the securities.

That’s because Zions hopes that it can use the price of these “reference securities” in its calculation of Statement 123[R] stock option compensation expense. Last year, Cisco Systems (CSCO) tried to build a very private market for a somewhat similar security, to be used for the same end. The SEC turned down Cisco’s approach, and it had to stick with more traditional estimation of option fair values in calculating its 123[R] compensation expense. This time it’s a more visible market, at least for the moment of the offering. Whether or not the values gleaned from that market are permitted to be used in the financial statements remains to be seen.

ZION 1-yr chart: