Lashinsky on Siebel - THE BOTTOM LINE from CNN/Money
Friday, September 13, 2002
Cash for their trash
Siebel's plan to pay employees for out-of-the-money
options is innovative, but it's not a great deal for
shareholders.
By Adam Lashinsky
PALO ALTO, Calif. -- The funny thing that seems to have
been forgotten about employee stock options is that they
were always supposed to be considered an incentive for
employees to do good work. Add value to the company,
help the stock price rise, and your options will make
you additional money.
At least, that's how the argument started. Soon, though,
tech companies realized that employees considered
options an entitlement, not a privilege. The effect of
the stock price going down wasn't supposed to be part of
the equation. If the options didn't grant great wealth,
then an engineering worker bee could just walk across
the street to another tech company.
So management learned to re-price options, which was
kind of like me telling you that all the one-dollar
bills in your wallet actually now are Ben Franklins, and
it being true. Unsurprisingly, shareholders didn't much
like re-pricing because they didn't get their shares re-
priced to reflect their losses. Now accounting rules
make re-pricing practically impossible.
Into this debate steps Siebel Systems [SEBL], with a
heralded plan to pay off employees holding on to high-
priced -- and therefore worthless -- options. It's a
good idea for workers. And it's not a re-pricing. But as
we'll see, it's mainly just another way of the playing
the heads-we-win/tails-we-win game, while doing next to
nothing to alleviate the dilutive effect Siebel's stock
options have on ordinary shareholders.
Siebel's plan is to replace all options priced over $40
a share -- not including those belonging to the two co-
founders of the company -- with $1.85 per option, up to
$5,000 in cash, or restricted stock for employees whose
take would be greater than $5,000. In all, the maneuver
would enable Siebel to eliminate 32 million options.
Mindful of who benefits here, Siebel explains in a
regulatory filing that "we believe that providing our
employees with the opportunity to participate in the
offer will improve employee morale and better align our
compensation programs with the interests of our
stockholders."
This is a bold move. As New York Times columnist
Floyd Norris noted earlier in the week, this is a fresh
way of dealing with the issue of employee options
without resorting to re-pricing. Assuming the Securities
and Exchange Commission approves Siebel's plans, watch
for many other Silicon Valley companies to follow
Siebel's lead. That is, companies which, like Siebel,
have plenty of cash. (Siebel has $2 billion to play
with.)
The downside, however, is the money Siebel will spend on
this project to make employees happy. According to the
company's regulatory filings, it will shell out about
$63.6 million to cancel these options, $27.5 million of
that in cash. The cash component alone is a little less
than Siebel's second quarter net income. In case there
was any question, that money belongs to Siebel's
shareholders, who presumably have been paying the
salaries of Siebel's employees already.
The company effectively is saying that because one
upside potential plan didn't work out, the kind that's
supposed to reward employees if and only if the stock
does well, it will try a different way. For what it's
worth, the option cancellation will do little to
ameliorate the potential dilution of the employee stock
options. Siebel knows as well as its employees that
there's no threat of dilution from the $40-plus options.
They aren't ever going to be in the money. That's why
Siebel is canceling them.
As I explained in a lengthy piece
[
fortune.com
]
in the current issue of Fortune, the real dilution
threat is from the less expensive options, priced at
$10, $20 and $30 a share. Those aren't going away.
Siebel is one of the best-run companies in Silicon
Valley, a maker of software that big businesses use to
automate their sales forces and customer-service
outfits. It also was one of the highest flyers of the
high-tech boom, in part because it wasn't a flimsy dot-
com, but rather an immensely profitable company making
multi-million-dollar sales to Fortune 1000 companies.
Lately, Siebel has suffered along with every other
technology company, however, as corporate information-
technology managers have hesitated to buy large, tough-
to-install software programs. Its shares, once nearly at
$120, closed Friday at $8.22. Public investors who held
on for the sickening drop know as much about loss as
Siebel's employees do. The company is helping them too,
by buying back up to $500 million worth of stock.
Of course, that money, like the dough being used to pay
off employees, belongs to the shareholders in the first
place.
----
Adam Lashinsky is a senior writer for Fortune magazine.
Send e-mail to Adam at lashinskysbottomline@yahoo.com. |
