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How The DreamWorks Animation Sale Rumor Turned Worthless Stock Options Into A Small Profit For Jeffrey Katzenberg

Katzenberg bought more than 420,000 DreamWorks Animation stock options on Sept. 29, the first trading day after the Softbank deal rumor surfaced, and immediately sold them. They were set to expire on Oct. 27, and without the stock price pop from the deal rumor, they likely would have been worthless.

Posted on October 10, 2014, at 8:43 p.m. ET

Chris Ritter/BuzzFeed

A domino effect prompted by the short-lived rumor that Softbank was in talks to buy DreamWorks Animation helped save nearly half a million stock options held by the studio's chief executive, Jeffrey Katzenberg, from being worthless.

Here's what happened: On Saturday evening, September 27, rumors surfaced that Softbank, the Japanese telecommunications and Internet conglomerate, was discussing a deal to buy DreamWorks Animation for $32 per share, or $3.4 billion.

Predictably, news of the potential deal sent DreamWorks Animation shares soaring when trading opened the following Monday, September 29. The stock of the studio behind Shrek, Kung Fu Panda, and the recent hit How to Train Your Dragon 2 leapt by 26% to $28.18 per share, a gain $5.82 from its closing price of $22.36 on Friday, September 26, the last trading day before the deal rumor surfaced.

According to a regulatory filing, on Monday, September 29, the first trading day after the Softbank deal rumor emerged, Katzenberg bought 423,214 DreamWorks Animation options granted to him as part of the studio's 2004 IPO for $28.00 per share, or $11.85 million. The $28 value ascribed to Katzenberg's options represents the strike price, or value per share of each option, when they were granted. They vested in 2009, and were set to expire on October 27.

Immediately after buying the stock, Katzenberg sold them for $28.05 per share, or $11.87 million, for a profit of a little over $20,000 before taxes and broker commissions, the filing shows. That's tiny by multi-millionaire standards — Katzenberg is among the richest men in the world with a net worth somewhere between $860 million and $957 million depending on who is doing the calculating. But, by way of comparison, it is still more than the $15,080 annual salary for a person who works 40 hours per week at the minimum wage of $7.25 per hour.

Had DreamWorks Animation shares reached, or exceeded, the $32 Softbank was rumored to have offered — which is common when investors believe a deal is both real and imminent — Katzenberg could have sold his options for $13.5 million, profiting just under $1.7 million in the process.

Katzenberg sold the shares under a pre-established trading plan that goes by the arcane "Rule 10b5-1" under the U.S. Securities and Exchange Commission code, the regulatory filing shows. The purpose of this rule is to insulate executives and company officers from insider trading charges by allowing them to sell a set number of shares at predetermined times. The idea is that if a material event — like, say, a potential acquisition — happens to take place around the time of a preset share sale it would be a coincidence.

A check of DreamWorks Animation's closing share price going back to March, when a representative for the studio told BuzzFeed News the plan was established, shows that its shares broke the $28 threshold on 7 different occasions — once in April, twice in May, and four times in June. However, regulatory filings show that the September 29 sale is the only one to occur under the terms of the pre-established trading plan. The representative said the reason for that is because there is a standard blackout period of between 30 days and 90 days from trading after such plans are established. The SEC does not require companies or executives to make the terms of such plans public. (The SEC is currently investigating the write-down of film inventory DreamWorks Animation took on the movie Turbo in February 2014.)

The possibility of Softbank buying DreamWorks Animation was short-lived, however, as The Wall Street Journal and other outlets ended up running reports on September 29 — the same day Katzenberg sold his shares — that talks between the two companies "have cooled."

"It wasn't immediately clear what had happened between Saturday, when the talks were under way, and Monday," the Journal said.

Starting almost immediately after the reports that the deal was called off, the studio's stock began giving back nearly all of its gains, ending trading Friday down $2.09, or 9%, to $20.65 per share, lower than where it was before the rumors surfaced.

Absent the deal rumor, there is no obvious catalyst in the coming weeks likely to emerge to prompt the studio's stock to break the $28 barrier on their own. The company doesn't report earnings again until October 29 — two days after the options were set to expire — and doesn't have another movie in theaters until next month. (DreamWorks Animation reported a $15 million loss for the second quarter)

Put another way, the fleeting spike in DreamWorks Animation's share price prompted by the Softbank sale rumor ended up turning 423,214 options that likely would have been worthless into a $21,000 gain for Katzenberg. And if the stock moved to where the rumors hinted at, he could have made a seven-figure profit.

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