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Network Associates' Larson Looks Out for No. 1

Our new columnist debuts with items on Restoration Hardware and honest bankers -- plus, a vocab lesson.

(Editor's Note: It is with great pleasure that we introduce Adam Lashinsky to the pages of A well-regarded chronicler of Silicon Valley, Adam most recently wrote for the San Jose Mercury News. He's known for scoops, clever writing and an irreverent style, just our type. For those not familiar with Adam, we believe you'll really like his stuff, primarily because he digs deep to get you precious information that you can't find anywhere else. For those who have come to know him, he'll keep slinging the same stuff that you've come to expect. So read on, and feel free to fire a note to to let us know how you think the new kid is doing.)

There are all sorts of ways the CEO of a big public company can make money. The preferred way is to run a great company whose stock price goes up, enriching the stockholders and the CEO in the process.

Then there's William L. Larson's way: Get your company -- in this case,

Network Associates


-- to invest cold, hard cash in an unrelated company in which the CEO has a large stake. While you're at it, pay a member of your board's compensation committee, in cash and stock options, to be a consultant to the outside company. Oh, and another good one would be to carve out a Web-oriented piece of the existing company and award yourself a jumbo options package in the .com business so you can clean up when it goes public.

Sounds fanciful, no? But these are the goodies Larson has secured for himself even as the fortunes of his formerly high-flying network security software company have been souring. According to an amendment filed late Friday to the Network Associates 10-K statement with the

Securities and Exchange Commission


Santa Clara, Calif.-based Network Associates has invested more than $8.5 million in


, a Mount Laurel, N.J., "free PC" company that gives customers a computer in return for a subscription to Internet access and technical support. Not including unexercised warrants, Network Associates has a 12% stake in DirectWeb. Larson, a founder and board member of DirectWeb, has a 35% stake in the young company, as does its CEO, Dennis Cline, a former Network Associates sales vice president.

Virginia Gemmell, one of two members of the Network Associates board compensation committee, is collecting $2,500 per month as a consultant to DirectWeb, in which she received 30,000 options in April. Gemmell is president of


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, an "image" consulting firm in Virginia. The compensation committee on which she sits awarded CEO Larson a 47% salary increase in 1998 (to $420,000, not including a $454,000 bonus) as well as 300,000 options to buy Network Associates stock at 31 5/16 per share.

Network Associates has created a separate subsidiary of its

Web "portal," a site where users can purchase and get technical assistance for the company's leading McAfee anti-virus software. CEO Larson is the proud owner of 1.5 million options to buy stock, a 5% stake in the pre-IPO company, according to the Network Associates filing. Network Associates, by the way, is valuing each share at $6.09, giving the wholly owned unit a valuation of $182.7 million.

These developments come just as Network Associates is being forced to hit the "reset" button on its business. Larson has been a ceaseless promoter of his company's stock and repeatedly patted himself on the back for delivering 21 consecutive quarters of exceeding or beating Wall Street's expectations. That string ended this year when Network Associates acknowledged it had too much inventory in its distribution channel and that sales had slowed dramatically.

The stock, which peaked at 67 11/16 per share just before the end of last year, now is worth 12 9/16.

It's not as if Larson isn't trying to boost Network Associates' stock price. Last week, he told investors at the

Hambrecht & Quist Technology Conference

it is likely Network Associates would begin a stock buyback program soon.

Larson was on the East Coast Tuesday and wasn't available for comment. A Network Associates spokeswoman says there is no official buyback program in place, though she does confirm that the company recently repriced stock options for employees who aren't officers.

So let's tally things up. Investors who stuck with Network Associates throughout its fall are out of luck for the time being. Employees willing to stick around long enough for their repriced options to vest eventually may be in the money. And CEO Larson and some of his top lieutenants -- who also received options -- should make out famously when the Web site goes public later this year.

There are all kinds of ways to make lots of money.

Read the boilerplate:

When shares of

Restoration Hardware


imploded on Friday, my new colleague

James J. Cramer

lamented that he'd missed a short-selling

opportunity as a result of the

Peter Lynch

principle: He likes the stores, so he liked the stock. Never mind that they couldn't deliver a new bed to him in less than six weeks -- not exactly a good sign. Moreover, he'd heard the sweet words of a top Resto executive, who had told a


audience there'd be no willy-nilly growth at the trendy Corte Madera, Calif.-based retailer.

But a better place to look for warning signs on Restoration Hardware -- rather than in their tony stores or on the boob tube -- was in the company's IPO prospectus in the summer of 1998. At that time, Restoration Hardware noted it would be expanding rapidly, might have erratic results and, by the way, didn't keep audited results before 1995, forcing it to use old tax returns to draft the S-1 registration statement. This was all duly noted in a June, 1998, piece at this column's former home in the

San Jose Mercury News

(joke: the "hardware" in the name was -- and is -- the only justification for putting this in a tech-stocks column).

To run the nasty scorecard, Restoration Hardware went public in June 1998, traded as high as 37 3/4, and closed Tuesday at a smidge over 14. Matthew J. Fassler, an analyst with

Goldman Sachs

, the lead underwriter of Restoration's IPO, removed the retailer from Goldman's recommended list Friday, saying, "the company continues to confront challenges in developing the distribution and financial planning infrastructures necessary for supporting its rapid growth." Company executives routinely poo-poo the importance of risks disclosed in SEC filings. Heeding the risks Restoration's lawyers forced it to place in its IPO documents could have saved some investors some heartache.

Honesty outbreak:

You know the tenor of the tech-stock market is changing when sell-side analysts (the kind that "sell" research, as opposed to "buy-side" analysts who help make investment decisions) find themselves being candid about the stocks their investment-banking colleagues back.


Credit Suisse First Boston

Internet analyst Lise Buyer, who downgraded CSFB client


(INTU) - Get Intuit Inc. Report

April 9 for having committed no greater sin than having reached her price target of 110. Shares of the Mountain View, Calif., maker of tax and personal finance software are down more than 37 since then, closing Tuesday at 72 3/4. She made -- or saved -- her clients a bundle.


Morgan Stanley Dean Witter

analysts George Kelly and Chris DePuy, who on Tuesday issued a neutral rating on

Extreme Networks

(EXTR) - Get Extreme Networks Inc. Report

, the Santa Clara, Calif., networking products company with about $70 million in annual sales and a market capitalization of more than $2 billion.

In a sane world it would come as no surprise that Morgan would be neutral on Extreme at 53, Monday's closing price, considering the bankers thought the stock was worth 17 when they priced the IPO on April 9. But the norm for the last year has been for analysts to issue buys as soon as they're allowed to initiate coverage 26 days after the IPO.

Not the Morgan networking analysts.

"We believe the stock, trading at 11.6 times

estimated calendar-year-2000 revenue, fully reflects a very strong growth outlook already," Kelly and DePuy told clients. The result: Extreme's shares dropped 7 3/8, or 14%, to 45 3/4.

The bottom line is that investors have come to expect the initiation of coverage by the underwriting analysts to be yet another buying opportunity no matter the post-IPO performance. Perhaps that game has run its course.

Only so many ways to say it:

The bane of stock-market writers is coming up with fresh ways to describe stock movements. The darn things only move in two directions, up and down (and sure, before the wiseacres weigh in: sideways.)

But clearly there's an editor at the C section of

The Wall Street Journal

whose job it is to make sure no active verb gets used twice in one article. On Friday alone, according to Monday's "Small Stock Focus" column, shares of Restoration Hardware "plummeted,"

General Binding



," Building One Services

(BOSS) - Get Global X Founder-Run Companies ETF Report


Command Systems





"slid" and

Integrated Health Services



With help from my

Microsoft Word

thesaurus, they also could have used: dove, nose-dived, skidded, slipped, descended.

Talk about getting that sinking feeling.