Siebel's Case Shows a Hole in Black-Scholes

Jeff Brotman, a law professor who teaches accounting at the University of Pennsylvania, said the gap between the $650 million estimate and the $54.9 million charge taken by Siebel is "not that shocking."

It reflects the large drop in value of Siebel's shares since the options were granted, he said. By Brotman's figuring, the unvested, outstanding shares were valued at roughly $38 at the time of the exchange plan. He says that cost is not so outlandish given that Siebel's shares were trading at roughly $100 when the estimated value of the options was calculated, Brotman suggested.

"We've had tremendous diminution in value," Brotman said. "The fact that things turned out to be less valuable than people had anticipated, that's no different than during the '90s when many, many times options turned out to be incredibly more valuable than if you used Black-Scholes."

But even Brotman acknowledged the $650 million charge to be footnoted by Siebel does not offer a lot of meaning to investors. "It shows investors that it [the option] was worth a tremendous amount of money at the time they gave it," he said.

Ives of Friedman Billings Ramsey said most investors would view the footnote charge as a "nonevent," but it does reveal one thing. "When you see such a big charge like this, it just illustrates the amount of options that Siebel is dealing with," he said. And that could be a concern for investors because the more options outstanding, the greater the potential for share dilution.

Siebel CFO Ken Goldman called the $650 million estimate "meaningless" and a "fictitious expense," though he said the company informed investors that it would be included in an upcoming footnote in the interest of "clear disclosure."

Like other opponents to expensing stock options, Goldman argued in an interview Friday that being forced to move that cost from a footnote to the income statement would merely create another form of pro forma earnings because analysts would likely deduct the options expense to get a clearer picture of the company's operating performance.