Christmas In October
Elizabeth MacDonald, 10.19.05, 6:00 AM ET
NEW YORK - Christmas has come early to many executives across the U.S.
To avoid a potentially disastrous hit to earnings, companies are clamoring to vest their employee stock options right before the Jan. 1 deadline for a new accounting rule that forces them to subtract options from profit.
To date, 375 companies have pulled this vesting runaround, avoiding an estimated $2.7 billion in total after-tax charges to profit, says the Analyst's Accounting Observer, a newsletter in Baltimore, Md.
So far, the big winners have been Comcast (nasdaq: CMCSA - news - people ), which has avoided an estimated $48 million in charges; Symbol Technologies (nyse: SBL - news - people ), an estimated $65 million; and Applied Materials (nasdaq: AMAT - news - people ), an estimated $90 million.
The three join early proponents of the move, Viacom (nyse: VIA - news - people ), which avoided a big $277 million in charges; Sun Microsystems (nasdaq: SUNW - news - people ), which dodged an estimated $260 million in earnings hits; and McKesson (nyse: MCK - news - people ), which avoided $117 million doing this end-run.
Typically, executives can't exercise stock options until they officially vest, and many grants are stretched over a five-year period with, say, the first 20% vesting in the first year and equal amounts in remaining years. Businesses must set the value of these options on the grant date but don't have to report the cost of these options in their footnotes until the options actually vest.
However, by accelerating their executives' potential payoff several years earlier than otherwise allowed under their usual vesting schedules, the companies take the hit to earnings today, and they then only have to bury that charge in the footnotes. That way they can avoid deducting the option costs from next year's profit, when the new rule takes effect.
"It's accounting gimmickry at its legitimized worst," says Jack Ciesielski, who runs the AAO newsletter. Ciesielski, who has been following the problem for months, says that such accelerations are really "a covering up of management tracks." He notes that such a step, done to protect future earnings, "speaks of unease with the future outlook." Moreover, it lets executives "benefit personally at a cost to shareholders."
Of the 375 companies, 140 are in the information technology sector (avoiding a total of $1.37 billion in charges), and 67 are in the health care sector (avoiding $465 million in charges). Ciesielski also says that this is a "small-cap phenomenon," as 164 of the companies are in the Russell 200, while 39 are in the S&P 500. Only 20 companies, including Viacom, Sun Microsystems and McKesson, account for a whopping 64% of the total charges avoided.
Eleven companies, including Ivax (amex: IVX - news - people ), Immunomedics (nasdaq: IMMU - news - people ), McKesson and Northern Trust (nasdaq: NTRS - news - people ), did what Ciesielski dubs "insta-vesting," where they made option grants and vested them immediately or within an unusually short period of time, typically less than six months.
Biotech Heska (nasdaq: HSKA - news - people ) even executed a "blank check" wrinkle in its vesting accelerations, promising instant vesting on any options through year-end 2005.
Ciesielski expects the fourth quarter will be a big one for "options porkers," with accelerated vesting happening right up until the Jan.1 deadline. He also has noted that, although options were meant to keep employees, it's likely that workers now will up and quit after they exercise and own these shares.
So much for the idea that options "align" employee interests with shareholders. |
