Tony,
Kap was kind enough, on the AMD thread, to point out the following article:
AMD CEO Takes Investors for Ride
Commentary. Graef Crystal is a columnist for Bloomberg News. The opinions expressed are his own.
By Graef Crystal
Las Vegas, March 30 (Bloomberg) -- You can count on two things at Advanced Micro Devices Inc. First, shareholders of the Sunnyvale, California, chipmaker will be subject to volatility that matches the scariest roller coaster they ever rode.
And second, whether ordinary AMD investors fare well or not, founder and CEO W. Jerry Sanders III always will come out on top.
Make no mistake, putting money in AMD isn't for the faint of heart. I looked at the company's one-year daily stock-price volatility on Monday. Checking AMD's volatility as of every March 26 over the preceding 10 years, I found that the stock on average was 4.6 times more volatile than the Standard & Poor's 500 Index.
Of course, to shareholders who bought Advanced Micro on the last trading day of 2000, the return in just under three months was a luscious 108.1 percent. Had they invested in the S&P 500, their holdings would have withered by 12.5 percent.
Given that performance, should eyebrows now be raised just because Sanders exercised options on 3.4 million shares in 2000, gaining $85.1 million? Or because, as of March 26, he was sitting on 4.2 million unexercised shares worth another $79.6 million? Indeed, should anyone be bothered that Sanders' gains total $212 million from exercising stock options between 1992 and today, coupled with paper profits on currently unexercised options?
Well, yes, you'd think shareholders would be up in arms. Sanders really deserved nothing at all for what turns out to be a terrible performance during his career.
Laggard
For the 20-year period ended March 26, AMD's total return amounted to 9.8 percent a year, or only 67 percent of the 14.6 percent-a-year return of the S&P 500 Index. And to get that return an AMD investor needed to stomach the 4.6-to-1 volatility of a roller coaster.
Even a 9.8 percent-a-year return applies only to those who bought on March 26, 1981, and sold 20 years later. Given AMD's extreme volatility, investors who bought later -- and sold earlier -- would have fared otherwise, whether better or worse.
To shed light on this aspect of Sanders' performance, I graphed every one of the 5,055 closing prices of AMD during the 20-year period, drawing a trendline through them. The slope of that trendline showed an utterly laughable 4.4 percent-a-year return to shareholders. The S&P 500 Index, calculated in the same manner, returned 13.4 percent a year over the same period. And that doesn't count the dividends that would have been earned on an S&P 500 investment. (AMD pays no dividends.)
So, working with every price during the last 20 years, we must conclude that Jerry Sanders has given shareholders, on average, a return that was substantially lower than what they could have received by investing in riskless Treasury bonds.
How could an executive with such a bad performance keep his job all these years? Ironically, the answer may lie in AMD's immense volatility. Just as AMD's board might be getting fed up, the company's stock price takes off -- though only for a while.
Profitable Strike
Take a look at that 108.1 percent return since the beginning of 2001. Even with that, the closing stock price of $28.74 on March 26 was still 39 percent lower than the company's alltime high closing price of $47.50, recorded last June 21.
Sanders, on his part, makes money not only by exercising options at the top of the roller coaster but also by receiving options at prices near the ride's bottom. For example, on Sept. 30, 1996, he received an option on 5 million shares carrying a strike price of $7.38 a share. To be sure, that was the price at which the stock closed on the day of the grant. But the stock also closed at that or a higher price on 2,258 other occasions between July 28, 1980 and the date of the grant.
On top of all that, Sanders was a serial option repricer earlier in his career. Between 1984 and 1990, his options had their strike prices retroactively lowered on six different occasions.
Severely criticized by, among others, the giant California Public Employees Retirement fund for his actions, he blamed the company's troubles on Japanese competitors, implicitly buying into the notion that executive rewards ought to be predicated on relative, and not absolute, performance. However, as he reaped his $85 million of option gains in 2000, he was curiously silent as to the stock market's impact on his company's stock price.
Volatility's Winner
Investors need look behind the gains executives receive from exercising stock options. In many cases, large gains mean shareholders also cleaned up. In the case of a Jerry Sanders, large gains mean only that a CEO knows when to get himself granted a large option -- and when to exercise that option. In that sense, stock options become an incentive not for performance but for increased volatility.
A few years back, an investment banker told me that he had a surefire way to make lots of money from AMD. ``Buy when it gets down to 20,'' my friend said. ``And then short it when it gets up to 40. You'll make a fortune between 20 and 40.''
I laughed and went about my business. I thought he was only kidding. |
