Broadcom 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
. And repricing options is just one of the approaches used by tech companies to keep employees loyal even as share prices fall.
, for one, has been rapidly expanding its buyback efforts to offset options-related dilution.
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.
Broadcom co-chairman and former CEO Henry Nicholas also has been among the leading inside sellers in all of tech. Last year, despite the tumbling share price, Nicholas sold more than $13 million worth of company stock.
But Broadcom offered a different interpretation, saying the repricing was good for everyone. "Together, we all win as Broadcom is able to retain and motivate our most important asset, our employees," CEO Alan "Lanny" Ross said in a press release Monday.
Now More Than Ever
Industry observers say they expect to see more repricing moves by tech shops with options under water, as accounting reforms get closer. The Financial Accounting Standards Board is expected to recommend a rule later this year that options should be treated as expenses.
"The writing is on the wall -- options as an expense is coming," says Bonavico. "I think we'll see more companies, in a rush to get in under the wire, put money in their own employees' pockets through repricing."
Last month, software developer Adobe said it would seek shareholder approval for a swap of two worthless shares for one at the current trading price. And last year, stock-option giant Siebel offered a swap and cashout to employees. The business software maker took a $55 million charge for the program.
On a similar front, Cisco has been issuing new stock options at current market prices, but has been able to neutralize the dilutive impact of the millions of new shares through a major stock-buyback program.
doubled down on its already heavy stock-buyback effort last month. The networking gearmaker increased its budget for stock repurchases by $5 billion, giving the company a total of about $8.6 billion to pursue buybacks.
But to some observers, the repricings and new stock grants are merely signs that what was once a reasonable incentive practice has now spun terribly out of control.
Tech companies basically invented the modern practice of stock options. It was seen as the only way to lure engineers away from the safety of their cushy careers at tech powerhouses like
. In addition to a salary, key employees also got a stake in the business as a reward for the risk of going with a start-up.
"What started as an investment reward has turned into a pay entitlement often rationalized as a way to attract and keep talent," says a New York hedge fund manager with no Broadcom position but who is short Siebel.
"Options are abused in the tech world," says the hedge fund manager. "And the sad part of it is that the Street looks through it because they are noncash items."