Broadcom Throws Workers a Repricing Rope

Broadcom (BRCM) continues to put shareholders first. At least those who happen to work there.

The Irvine, Calif., communications-chip maker set plans Monday to let employees swap millions of out-of-the-money options for a smaller number of market-priced ones. With the decision, which will saddle the company with a $238 million charge, Broadcom joins a growing number of once-hot tech firms using various strategies to keep stock compensation alive in an era of plunging share prices.

But to listen to some people, the tech industry practice of issuing and sometimes repricing options en masse is troubling because it dilutes shareholders even if it does help to retain talent in an absurdly soft job market. Meanwhile, critics charge, managers keep selling, the stock keeps stumbling and outside investors are left holding the bag.

"This is really a case of Broadcom management saying heads I win, tails you lose," says TransAmerica Investments money manager Chris Bonavico, who has no Broadcom position. "They got to cash out on the way up and they don't have to share any of the pain on the way down."

Joining in a broad, war-driven rally Monday, Broadcom rose 50 cents to $13.63, 66% off its year-ago high.

Striking While the Iron's Hot

Broadcom will effectively reprice out-of-the-money stock options by allowing holders of some 57 million options -- those convertible into common shares at strike prices above $23.58 -- to swap those for 13 million new options or shares.

The proposed swap bears a similarity to recent moves by Adobe (ADBE) and Siebel (SEBL). And repricing options is just one of the approaches used by tech companies to keep employees loyal even as share prices fall. Cisco (CSCO), for one, has been rapidly expanding its buyback efforts to offset options-related dilution.

Incentivized How options boosted Broadcom

To listen to some people, however, repricing stock options for employees only accentuates an already lopsided arrangement that offers no such bailouts for outside shareholders. While management theory advocates the use of options primarily as an incentive to boost company performance and shareholder value, it's worth noting that Broadcom shares have dropped some 95% in the past three years. And the repricing is only the latest of what has been a tradition of not-so-friendly treatments foisted on shareholders.