Kingdom lost, for want of a horse. J.P. Morgan plug pulled, for want of $35.
cnn.com
The check is in the mail. J.P. Morgan and Company found itself isolated
from the cyberworld for a day when the Wall Street institution lost its
site on the Internet. Network Solutions, the company that registers
domain names, pulled the plug on the $21 billion bank because of an
unpaid balance of $35. It seems J.P. Morgan forgot to pay its
registration fee to renew its domain name. That left frustrated clients
unable to visit the site or e-mail the firm's bankers and traders.
Hmm, wonder if the bank got hit with a late fee?
cnn.com
Business Unusual
Sycamore Networks Chairman Talks About Indian Influence on Dot.Coms
Bonnie's Cookies Hit the Net
Are Stock Options Losing Their Luster?
Aired June 18, 2000 - 6:30 p.m. ET
RHONDA SCHAFFLER, HOST: Ahead on BUSINESS UNUSUAL,
it's making people quit their jobs,
move their families and go to places previously unconsidered
stock options,
the gold rush of the new millennium, and the risks are high.
The mystical secrets of Silicon Valley.....
After 17 years in business,
one might be reluctant to change anything.....
That's all ahead on BUSINESS UNUSUAL.
There was a time when you'd mention stock options at a party and a hush
would descend on the room. But today's stock options, the holy grail of
the new economy, could be losing their luster.
Lauren Thierry takes a look at the anatomy of stock options, what they
mean to companies and shareholders and the employees that hold them.
UNIDENTIFIED EMPLOYEE: Nefiti (ph), sell 22, 22 bigs.
UNIDENTIFIED EMPLOYEE: (UNINTELLIGIBLE) 150.
UNIDENTIFIED EMPLOYEE: I sold them at a 1/2.
LAUREN THIERRY, CNN CORRESPONDENT : The battle cry for the
new economy, show me the stock options.
UNIDENTIFIED EMPLOYEE: You feel like you own a piece of something that
you're doing.
BRYN BRISCUSO, BUSINESS DEVELOPMENT TEAM, INPHONIC.COM: It gets me here
early, keeps me here late and it's something exciting to talk about.
THIERRY: Offered as a form of compensation, stock options give employees
the chance to prosper as the company grows. Stock options created the
legendary Microsoft millions and catapulted many a Silicon Valley
technoid into movie star wealth.
Entrenched in the culture, options have become the stuff of Hollywood
scripts. Tom Cruise's mission is to stop a madman who plans unspeakable
evil in order to get his hands on, you guessed it, stock options.
UNIDENTIFIED EMPLOYEE: Twenty thousand and a half, Jim.
THIERRY: Despite a stomach turning market, options still hold the
mystical lure of a seemingly infinite but unknown amount of money down
the road.
UNIDENTIFIED EMPLOYEE: The stock options make the offer more sexy.
UNIDENTIFIED EMPLOYEE: It's the primary reason why I came aboard.
UNIDENTIFIED EMPLOYEE: They're gravy. It's icing on the cake.
THIERRY: Nowhere are options more pervasive than in the cash burning
technology sector.
UNIDENTIFIED OPERATOR: Thank you for calling Inphonic.com.
THIERRY: In Washington, D.C., fledgling Internet company Inphonic offers
each employee a piece of the action. For top jobs, the pre-IPO company
pays 25 percent in cash, 75 percent in stock options.
DAVID A. STEINBERG, PRESIDENT & CEO, INPHONIC.COM: It enables us to not
only bring in high quality talent, but also make them feel a partnership
with the company itself. If we succeed, they succeed.
THIERRY: Fast growing Internet portal Lycos gives stock options to just
about all of its workers. The Boston-based company, which has recently
agreed to be acquired by Terra Networks, has grown revenue by more than
125 percent each year in the last two years.
BOB DAVIS, CEO, LYCOS: It's better than any carrot, it's better than any
stick, it's better than any environment that we might find. So it has
people really caring about the results of a company.
THIERRY: For typical employees like this one at Lycos, options are
granted and priced when the employee starts work based on that day's
closing price. This employee started on October 1st, 1998. His strike
price is $15 a share. He was given 1,000 options he could buy some time
in the future at that price. By May 18th, 2000, with Lycos closing at
just over $62, there's a gain of over $47 per share.
With 1,000 options, he would then hold paper valued at over $47,000. In
the future, if Lycos' stock drops below $15, the options would be
worthless.
DAVE CRANDALL, NETWORK OPERATIONS SUPERVISOR, LYCOS: This is where we're
watching the stock quota as it goes up. THIERRY: Dave Crandall, a Lycos
network operations supervisor, is in the money. On his first scheduled
exercise date, he cashed in.
CRANDALL: My first set, I took it all right away. Most of it went to pay
off college loans but some of it went for a new stereo and the
downpayment on the new car. I'm going to maybe get a boat or something
that I can play with. It excites you the whole time waiting for it and
watching it.
THIERRY: While options are often touted as the rocket fuel for the new
economy, not everyone is excited about the arithmetic. Critics point out
that options are not being accounted for on the balance sheet and are
only listed in footnote form in the annual report.
(on camera): If stock options are not subtracted as an expense then
critics say the earnings on the balance sheet may not be as robust as
reported, especially those companies that give stock options to
everyone. In that case, shareholder value could ultimately be diluted.
: In 1999, Mike Mayo authored a study in the banking sector.
MIKE MAYO, MANAGING DIRECTOR, CREDIT SUISSE FIRST BOSTON: Our study
showed that if you recognize the cost of stock options, earnings in the
banking industry were declined by, on average, three to four percent, at
some large banks by 10 percent and some outliers by as much as one
third. So the bottom line is the under side of stock options is that the
risks are underestimated.
EDMUND L. JENKINS, CHAIRMAN, FINANCIAL ACCOUNTING STANDARDS BOARD:
There's an impact on the credibility of the reported earnings of a
company that arise from not recognizing the cost of issuing stock
options.
THIERRY: Lycos CEO Bob Davis, who has over three million unexercised
options, disagrees.
DAVIS: No, I don't think options are ever anything that we should see
appear on a company's profit and loss statement or its income statement,
as it's known. I don't think that would be appropriate because I really
don't see it. There's never a guarantee of value. There's never a
predetermined time when an employee might sell the option. You never
quite know.
JENKINS: Others believe that issuing stock is different than issuing
cash and that stock is just a piece of paper and has no consequences and
shouldn't attract a compensation charge. Well, if that's so, I'd very
much like for them to send me some of those pieces of paper because I
think that that's probably not really the case.
DAVIS: I think if we try to put too many controls around options, we
really hurt what has been one of the greater drivers, I think, of the
U.S. economy. THIERRY: Davis is clearly not alone in his opinion. In
1995, efforts by the Financial Accounting Standards Board to change the
rules met with fierce resistance from corporations. Ultimately,
Congressional pressure forced the matter off the table.
JENKINS: Our last attempt at the board to improve accounting for stock
options was derailed politically by Congress. I think the argument there
was you're going to destroy this new economy.
THIERRY: Still, there's a growing concern on Wall Street for companies
with more than 20 percent of their stock in unexercised options.
VINCE FARRELL, CHAIRMAN, CHIEF INVESTMENT OFFICER, SPEARS, BENZAK,
SALOMON & FARRELL: I think what's going to be forced upon industry is a
disclosure that these options really are out there and it might dilute
greatly the earnings you think the company's going to deliver to you,
the shareholder.
DAVIS: I think dilution as it relates to stock options is probably
terribly, terribly overweighted as a concern and the reason for that is
if you're a shareholder, what you want more than anything is a company
that shows extraordinary performance. And a stock option is one of the
greatest paths for doing that. It has very, very motivated employees.
BOB OLSTEIN, PRESIDENT, OLSTEIN FINANCIAL ALERT FUND: Some of these high
tech companies like a Microsoft or a Cisco, their earnings are being
overstated somewhat by as much as 10 or 15 percent.
THIERRY: Bob Olstein, President of Olstein Financial Alert Fund, says
stock options are being abused.
OLSTEIN: We have to rethink the whole subject of compensation expense
through stock options as a major form of compensation, the pitfalls of
being exposed with this volatile stock market. All these paper
millionaires are no longer paper millionaires. They're going to find out
stocks go in two directions. Maybe they're going to want real cash
again.
SCHAFFLER: When we come back, we'll find out what happens to those
100-hour-a-week employees when the stock sinks and why in some circles,
options make people think of tulips.
And this entrepreneur may not be able to deliver stock options, but her
wares are certainly inviting, next on BUSINESS UNUSUAL.
SCHAFFLER: Despite the wild popularity of stock options, the truth is
you can only make money when the stock itself goes up. As Bob Olstein
pointed out in the first part of our story, the market goes in two
directions.
Lauren Thierry continues our look at the options behind options.
UNIDENTIFIED EMPLOYEE: Wages are up (UNINTELLIGIBLE). This is very bad.
UNIDENTIFIED EMPLOYEE: It's terrible. It's terrible. They're all bad.
They're all bad.
MAYO: When stock market prices go down, morale can be hurt by the many
employees holding stock options. It could force managements to pay more
cash compensation instead of stock.
FARRELL: Are you going to have to pay your people more in current cash,
and that will change the profitability of the company.
THIERRY : If stocks drop at emerging companies, they will
likely have a hard time coming up with the cash to pay their employees
market salaries. But even for larger companies, will employee loyalty be
pegged to the stock price?
STEINBERG: We're seeing a lot more resumes circulating from large,
publicly traded companies where people are saying that, you know, I'm
never going to be able to hit my strike price on this stock. Let me go
someplace where I can get in pre-IPO that we're going to be going public
in the next six to 12 months and really create some very serious value
here.
THIERRY: Disgruntled Web workers are airing their gripes online.
OLSTEIN: There's no golden goose out there. Back in the 1600s, it's hard
to believe, people sold their farm to get the tulip bulb so that they
could sell it to the next guy for a higher price. Now they wanted their
farm back because the tulip bulb was gone. So that's how I see the
parallel. The parallel is they're chasing the silver chalice.
THIERRY: Tulip mania has been invoked frequently to describe the dot.com
investment craze. Back in 17th century Holland, the buying and selling
of tulips brought hysteria. One Dutch farmer sold his 12 acre farm for
just one rare bulb.
(on camera): Today, stock options, like tulips, are wildly coveted and
have eked their way into all matter of transactions. P.R. firms,
architects, recruiters, lawyers, even landlords are accepting stock
options from companies in lieu of cash, mostly from the dot.coms.
ADAM BERNSTEIN, PRESIDENT, THE BERNSTEIN COMPANY: If a rent is $20 per
square foot and maybe you would take $10 of rent that gets paid to the
landlord and then you would also take $10 in stock options.
THIERRY: In fact, some firms without their own options are creating a
fund of other companies' stock options as a perk for their employees.
NORMAN SHERMAN, PRESIDENT, NORTH AMERICA GUNDERSEN PARTNERS: It's an
opportunity for us to really hit the pot of gold at the end of the
rainbow and reward our employees for a job well done.
THIERRY: A pot of gold or an empty promise. At the end of the story,
most analysts agree the markets will eventually decide.
FARRELL: I think a lot of this stuff has to sort itself out because I
think it's been a mania that has crested and is on the way down.
OLSTEIN: The market eventually adjusts to reality and whatever the
reality is it is and whether they put it off the financial statements,
on the financial statements, there can be long periods of time where the
market pays no attention but when it does, it's swift and furious.
THIERRY: For BUSINESS UNUSUAL, I'm Lauren Thierry, CNN Financial News.
SCHAFFLER: One interesting distinction between the dot.coms and the
tulip craze of the 1600s, even at its height, the Amsterdam Stock
Exchange, well established in 1630, wouldn't touch tulips.
But coming up, Indian immigrant to multibillionaire,
the story behind one networking maven and his company, Sycamore.
SCHAFFLER: A 1998 study estimated that nearly 800 high-tech companies
were run by Indian entrepreneurs. One of the most successful is Gururaj
Deshpande, chairman of Sycamore Networks.....
Just ahead, she turned a $15,000 investment into a $700,000 annual
return. The secret business recipe for Bonnie's Cookies, after this.
SCHAFFLER: Bonnie Barth had a great cookie shop but she wanted to expand
business hours to 24 by seven.
As CNN's Casey Wian tells us, she combined.....
SCHAFFLER: And that is BUSINESS UNUSUAL. This week we've shown you rise
and fall, fall and rise, and cookies that taste good on either end of
the scale. If you missed any of today's program, you can catch it on the
Web. Just log onto cnnfn.com and click on BUSINESS UNUSUAL.
I'm Rhonda Schaffler. Thanks for joining us. Good-bye from New York.
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