What happens to options after a takeover?

Lots of m&a activity starting. I was wondering what happens to outstanding options when a company is taken over.

Do listed options somehow benefit from the takeover premium, even though they might not expire until after the takeover is complete?

What about all those unlisted performance options that the company execs are holding?

Ferret

OK...

firstly we have to seperate them (the option types)...

Employee Options and Exchange Traded Options

Employee Options, being mostly OTC (over the counter - non standard etc) would be covered by a memo from finance/hr in the company regarding their status (whether they will be converted and the conversion basis, or whether there will be a cash settlement at time of takeover). This is normally negotiated during the takeover and is usually good as or better than what they had before.

Exchange Traded Options are covered by General Notices to ACH Participants.
http://www.asx.com.au/investor/options/notices/2006.htm

I am following the UTB/TTS merger with interest (just to see how it works).
They will attempt to mimic the effect on the underlying shares on the options.
This can be quite complex, especially when shareholders are given cash/share alternatives. It would be easy to just convert 1000 UTB to 4330 TTS, but they are considering all other options (such as modifying the contract size like they do on a capital adjustment).

Have a read of Notice 159 and see the complexities involved.

Hmm, yeah, it does look complicated. But it seems the holders of ETOs are protected.

Interesting about the exec bonuses. I know the a board is meant to look after the shareholders interests when they recommend accepting or rejecting an offer, but I wonder how much they are influenced by the generosity of any offer for exec options?

Ferret