Confessions of a SpinCo

Confessions of a SpinCo:

TripAdvisor’s recent spin-off experience and its impact on employee stock plans

July 19, 2013

Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.

Overview









TripAdvisor: At a Glance

A Fresh Start – Sort Of

The Netting Initiative

A Shift in Philosophy

2


TripAdvisor: At a Glance

TripAdvisor® is the world's largest travel site, enabling travelers to plan and have the perfect trip. TripAdvisor offers trusted advice from real travelers and a wide variety of travel choices and planning features with seamless links to booking tools. TripAdvisor branded sites make up the largest travel community in the world, with more than 200 million unique monthly visitors, and over 100 million reviews and opinions covering more than 2.5 million accommodations, restaurants, and attractions. The sites operate in 30 countries worldwide, including China under daodao.com. TripAdvisor also includes TripAdvisor for

Business, a dedicated division that provides the tourism industry access to millions of monthly TripAdvisor visitors.

Stock Ticker: Nasdaq: TRIP

Market Cap:

2012 Revenue:

$8.64 billion

$762 million

Index Membership: S&P 500

Founded: 2000

Headquarters:

Employees:

Global Presence:

Acquired:

Spin #1:

Spin #2 / IPO:

Newton, MA

~1,700 worldwide

~15 countries

IAC (2004)

Together w/ all other travel businesses under EXPE (2005)

December 2011

3


A Fresh Start – Sort of

The Spin





On December 20, 2011 TripAdvisor was spun-off from Expedia

Spin mechanics o Immediately prior to the spin-off, Expedia effected a 1-for-2 reverse split o As a result of the reverse split and spin-off, every 2 shares of

Expedia were converted into:

•

• One share of EXPE

One share of TRIP

4



The Spin

 What happen to equity awards?

o Conversion ratios were applied to preserve intrinsic value o But trailing obligations to non-employees were created by both EXPE & TRIP

Employee

EXPE

EXPE

EXPE

TRIP

TRIP

TRIP

Award Type

Option (vested)

Option (unvested)

RSU (unvested)

Option (vested)

Option (unvested)

RSU (unvested)

Result

EXPE option & TRIP option

EXPE option

EXPE RSU

TRIP option & EXPE option

TRIP option

TRIP RSU

5



The Spin

 IAC’s history of divestitures - with similar spin mechanics only further complicated the situation o Options settling in TRIP were also held by employees of:

HSNI IAC EXPE o Options held by TRIP employees settled in stock of the following companies:

HSNI IAC TREE TKTM IILG EXPE

• THE

RESULT

A long, material trail of non-employee / former

SpinCo obligations

A significant % of TRIP options were held by non-employees


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A New Vendor

 Administration of non-employee awards o Initially, all SpinCos resided on the same vendor platform

•

• This permitted sharing of employee indicative data across databases

Intra-SpinCo reporting was still required to handle ongoing payroll and accounting obligations o In Q1 2013, TRIP selected a new stock plan vendor

7



A New Vendor







TRIP’s move to the new vendor offered an opportunity to revisit the challenges and risks presented by administering non-employee equity awards

TRIP proposed that each employer would be responsible for administering the awards of only its own employees

Each employer would administer awards that settle in multiple CUSIPs through their existing recordkeeper

8



A New Vendor

 The proposal (in detail)

Objectives

Simplify participant experience

Enhance independence / controls

Minimize operational risk

Reduce administrative burden

+

Control all indicative data for employee awards on the same, new vendor platform

(tax rates, terms, etc.)

Receive all payroll reporting from one platform (new vendor)

TRIP

-

Establish old vendor controls to settle TRIP awards (DWAC)

Establish old vendor reporting to reconcile TRIP awards exercised by SpinCo employees

No need to keep indicative old vendor data feed

Single site / login for TRIP participants

+

Control all indicative data for employee awards on the same, old vendor platform

(tax rates, terms, etc.)

SpinCos

-

Establish new vendor controls to settle SpinCo awards (DWAC)

Receive all payroll reporting from one platform (old vendor)

Establish new vendor reporting to reconcile SpinCo awards exercised by TripAdvisor employees.

No need create indicative data feed to new vendor

Single site / login for SpinCo participants. No communication needed

9



A New Vendor

Pre Conversion

Trip Data “Before and After”

July 1 New Vendor - LIVE

TRIP only employees:

• TRIP Stock Outstanding and Not

Outstanding

• SpinCo Stock: Outstanding and Not

Outstanding

July 1 Old Vendor - LIVE

All TRIP and SpinCo Employees

Reside at old vendor

Spin-Co only employees:

• TRIP Stock Outstanding and Not

Outstanding

July 1 Old Vendor - FROZEN

All TRIP and SpinCo Employees’ Activity through June 28. This data will remain available for employees and corporate to view activity through June 28

Going forward –

Data from two vendors captures all TRIP Stock related transactions

Going forward –

This database stays static

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 In Q1 2013, the Company made a push to be less dilutive (i.e.,

BOD approved stock buyback program and implemented strict share pool management procedures) o The poster child of which was a “netting” initiative for equity

• With the exception of mobile employees, no one received a free pass. The initiative applied to:

•

•

•

•

•

Outstanding and prospective awards

RSUs and stock options

Exercise costs and taxes

Section 16 officers and rank-and-file employees

Domestic and foreign participants o The administrative and technical barriers to implementing the netting initiative were numerous


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Administrative Considerations





Net settlement of RSUs is old hat for most administrators

Net settlement of stock options is another story

Q: What are net exercises?

A: When a participant tenders a portion of the shares exercised back to the company to cover the exercise price and taxes due

Example

An employee holds an option to purchase 100 shares with an exercise price of $10 per share. The employee exercises the option when the

FMV is $25 per share.

Shares exercised

Shared tendered to company

Shares sold on open market

Shares issued

Same Day Sale

100

0

100

100

* EXERCISE COST (100 shares exercised x $10 price) / $25 FMV = 40 shares

TAXES [($15 per share spread x 100 shares exercised) * 25% tax rate] / $25 FMV = 15 shares

Net Exercise

100

55*

0

45

55% fewer shares issued



Administrative Considerations

TripAdvisor Guiding Principal

Participants would not view the initiative as a “take away”

 TripAdvisor was fortunate that the netting initiative was launched immediately prior to its vendor search

TAKE



AWAY #1: Relatively few vendors were able to preserve the pre-initiative user experience (i.e., the ability to exercise and immediately sell the shares)

TAKE

 AWAY #2: Given that fewer shares are on the table, increased vendor fees are a possibility

13



Technical Considerations

 An oversimplified view of the world

XYZ Inc.

14

Tax Authorities

Employee




 Accounting rules o US GAAP (ASC 718-10 )

• The risk

− If shares withheld, there’s a risk of triggering variable accounting for the entire award

− If cash withheld, similar risk is not present

• Can the risk be avoided?

− Yes - fixed accounting can be preserved if withholding occurs at a rate that does not exceed the “minimum statutory rate”

Different Methodologies Beget

Different Accounting Considerations

Cash

Employee Cuts A Check

Employer Withholds From Next

Paycheck

Employer / Employee Sells

Shares

Shares

Employer Withholds Shares

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 Accounting rules o

•

US GAAP (ASC 718-10)

Why do we care?

− Your finance team likely fought long and hard to ensure “fixed” accounting – and the predictability it brings.

ASC 718

ACCOUNTING TREATMENT OF

EQUITY INSTRUMENTS

ASC 718

ACCOUNTING TREATMENT OF

LIABILITY INSTRUMENTS

16

Stock

Price

$30

$20

Charge to Earnings

$10

$0

0 1 2

Issuance

3 4 5 6

Settlement

7 8 9 10 Years

 Charge to earnings = fair value determined via option pricing model

 Charge is fixed at grant and recognized ratably over vesting period

 Subsequent stock appreciation / depreciation will not increase / decrease the charge to earnings

Stock

Price

$30

$20

Charge to Earnings

$10

$0

0 1 2

Grant

3 4 5 6 7

Settlement

8 9 10 Years

 Charge to earnings = fair value determined via option pricing model

 Award is revalued each year (or quarter) from grant to settlement; the additional charge (or credit) is marked-to-market



Subsequent stock appreciation / depreciation will increase / decrease the charge to earnings




 Tax Laws o How do we determine the “minimum statutory rate”?

• In the US

−

−

Includes federal, state and local taxes (including payroll taxes)

Federal

−

 Supplemental withholding rates (25% / 39.6%) generally accepted as satisfying the accounting requirements

 FICA / Medicare withholding is also required

States





Only some have supplemental rates

If no supplemental rate exists, then treat like the foreign countries

17





• Outside the US

− Most companies will have withholding requirements in 1/3 to

1/2 of the countries in which they make grants

−

 And the list may be growing!

Very few countries have supplemental or flat withholding rates that apply to equity compensation

18





• Outside the US (continued)

− Most countries require companies to withhold at individual rates depending on:

−





The employee’s marginal tax bracket

Various deductions / exemptions / martial status, etc

 Social tax wage caps often applied on a monthly basis

This means that withholding rates vary by individual and may vary during the course of the year o Expats

• Industry advocates requested that FASB allow “hypo” tax for expatriates to be withheld in shares – FASB declined

19




 Tax Laws o Example

• German employee earning €100,000 annually exercises an option on

January 1 st vs. August 1 st What rate is the minimum statutory rate?

20 t e

R a

0%

€ 0 –

8,130

45%

42%

14%

€ 8,131–

52,882

€ 52,882

– 250,730

€ 250,731 and over

Tax Base




 TripAdvisor’s Challenge o RSUs

• Taxable events are more visible, more predictable

• It’s comparatively “easier” to get actual rates because of the ability to plan ahead o Options

• Exercises are more arbitrary, more real-time

• Requires a fire drill to determine an employee’s actual rate

21




 TripAdvisor’s Solution

Pre-Code Actual Individual Rates on a Monthly Basis

Pros Cons

Avoid the accounting issue

No local true-up required

Settles employee out of transaction quickly

Requires substantial real-time maintenance of individual rates

Requires close coordination with local payroll

Inherent risk of error

Consistent with the industry standard approach More challenging for broad-based population

Relatively labor-intensive; advance population of tax rates prior to vesting

22




 Legal o Does the plan allow net exercises?

o Can the requirement be imposed retroactively?

• May not be necessary if option agreements defer to the plan

23



 Equity under the old regime o An Exercise in Selectivity

Award Type Recipients Participation Rate % of Awards Granted

Stock options NEOs and select members of management team ~ 25% of employees ~ 99%

RSUs NEOs and select members of management team ~ 1% of employees ~ 1%

 Equity post-spin o Broad-Based Eligibility

Award Type Recipients Participation Rate % of Awards Granted

Stock options NEOs and select members of management team ~ 10% of employees

RSUs All employees 100% of employees

~

~

34%

66%

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 Drivers of change o Desire to better align employee interests with those of shareholders o Competitive pressures to attract and retain top talent o Desire to grow ownership in friendly hands

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Contact Information:

Yoon Park

TripAdvisor, Inc.

Director of Global Compensation and Equity

Email: ypark@tripadvisor.com

Phone: 617-670-6717

Geoff Hammel

ISP Advisors LLC

Managing Director

Email: geoff.hammel@ispadvisors.com

Phone: 215-GET-ISPA (215-438-4772)


Confessions of a SpinCo

Confessions of a SpinCo:

TripAdvisor’s recent spin-off experience and its impact on employee stock plans

Overview

XYZ Inc.

Contact Information:

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Confessions of a SpinCo