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Putting Fat Cats on a Capital Starvation Diet

Editor's Note: This column is a special bonus for readers. This piece originally appeared on RealMoney on May 27, and we're giving it to you in its entirety. To sign up for RealMoney, where you can read Arne Alsin's commentary regularly, please click here for a free trial. Also, if you're interested in chatting live at 1 p.m. today with Arne, please click here to sign up.

Starve them of capital. That's the simplest solution to what I've called "Corporate America's Dirty Little Secret" -- namely, the enormous transfer of wealth from shareholders to corporate employees in the form of stock options.

Starving them of capital means avoiding owning their stock. More than anything else, the issues of capital and stock value resonate in corporate boardrooms. If and when the big guns such as Fidelity, Vanguard and other large institutional shareholders draw a line in the sand and say "enough," the grab for shareholder property will be over.

Spa Diet

Consider Elizabeth Arden (RDEN), a leading fragrance maker that sells products such as Elizabeth Taylor's Passion and that recently secured Catherine Zeta-Jones as its spokeswoman. It's an interesting turnaround stock with a lot of potential pop. It's a $200 million company that could be worth $600 million or more with a successful turnaround.

However, two significant problems make it a nonstarter. First, long-term debt is too high at $317 million on a revenue run rate of about $750 million. This ups the stakes considerably for the owners of Elizabeth Arden equity. With such a weak balance sheet, the company doesn't have a lot of time to get it right with consumers.

Second, this company appears to be run for the benefit of management. Management's grab for shareholder property is excessive by any measure. In fiscal 2001, the company granted options representing 16.4% of shares outstanding, with one-quarter of that going to the CEO.

When the stock rallied in fiscal 2002, the number of options granted dropped considerably to about 1.3% of shares. But in fiscal 2003, the stock slid back to fiscal 2001 levels, and there was another big grant -- this time representing slightly less than 6% of shares.

The grab for shareholder property at Elizabeth Arden -- of roughly 25% of shares outstanding over the past three years (including some restricted stock grants) -- can be summarized easily enough: It's all about what management thinks it can get away with.
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