The multinational hotel chain, Hilton, was founded in 1921 by Conrad Hilton. His son Barron joined the company in the 1950s, and took over in 1966 as chief executive. When Conrad died in 1979, he left his son Barron a token number of shares of stock, and he left each of his grandchildren a piddling $10,000 each. Nearly all the rest of his wealth, specifically his 27 percent share of the Hilton Corporation, Conrad left to the Conrad N. Hilton Foundation whose earnings were used to support the charitable work of the Catholic nuns in California.
The result was to make Barron just another high level corporate manager who lacked the power of a major stockholder. Even with the stock options that he exercised over ten years as chief executive, Barron still owned only a tiny percentage of the company by 1985.
What Barron did was to enter into litigation, seeking control of the foundation’s stock shares of Hilton Corporation. Conrad’s will had specified that if for any reason the foundation was unable to accept his stock request, his son Barron had the right to purchase the stock at its market value as of 1979. US federal law prohibits charitable foundations from owning more than 20 percent of a public company. Therefore, Barron could legitimately argue that he was entitled to purchase for himself the 7 percent of the foundation’s stock shares that were in excess of the foundation’s allowable 20 percent. But Barron tried to argue that for byzantine legal reasons he was entitled to buy out the foundation’s entire stake. Moreover, by buying its stock for the 1979 price of $24, at a time when the stock was trading around $72, in effect Barron would paying $170 million for $500 million worth of stock. It is called a great deal, and it may also be called trying to rewrite your father’s will.
1. Using the case above as an example, what is a “public company”? Why companies issue stocks? What does stock represent?
2. The case mentioned that Barron Hilton was received options on Hilton stock as part of his compensation package as CEO of a major corporation. Assuming that all options Barron Hilton received are call options on Hilton stock, why corporate CEOs receive call options on their company’s stocks as their “salary” instead of a straightforward big-fat paycheck with which common people are more familiar?
3. Suppose that you are responsible for designing a reward package for Barron Hilton as CEO in the year of 1979 and at that time, the market price of Hilton stock is $24 per share. You have two choices:
(1) Award Barron Hilton call options on Hilton stock with strike price $25 and expiration day October 1980.
(2) Award Barron Hilton call options on Hilton stock with strike price $35 and expiration day October 1985. Which choice are you going to select for Barron Hilton? Why?