Pushing Fast-Forward on Options
Monday, December 19, 2005
At least 22 Washington area companies are among hundreds nationwide that have transformed millions of stock options, many of which would not have been available for executives to use until 2009, into fully vested shares.
According to Wall Street estimates, the fast-forwarding could wipe away more than $4 billion in expenses that would otherwise have shown up on income statements starting in 2006 under a new accounting rule that goes into effect Jan. 1.
None of this is illegal. But some financial analysts and corporate-governance experts say it is a dubious exercise nonetheless because it undermines the intent of the much-debated new rule. The critics also say that speeding up options hands an extra treat to already-well-fed executives, hurts a company's shareholders and misleads prospective investors.
Many of the companies that have pushed forward options vesting dates to beat the Dec. 31 deadline come from the high-technology and health care sectors, industries that have been heavy users of stock options in recent years.
Linthicum, Md.-based network specialist Ciena Corp., for example, announced in late October that it would accelerate the vesting dates for 14.1 million shares awarded to employees, officers and directors. Ciena said the accelerated vesting would help the firm erase $21.5 million in expenses.
While that is just a small fraction of the $436 million the company lost in the past year, executives nevertheless said they thought it made little sense for the company to record a cost based on options that are "out of the money," meaning the current market price of the stock had fallen below the fixed price at which the options were awarded. In such cases, employees typically delay exercising the options until the stock price rises. At that point, they are "in the money" and can be resold at a profit.
"Ciena's board of directors considered the expense savings that will occur under new accounting regulation and the lack of employee retention value associated with out-of-the-money options and firmly believes that accelerating these options is in the best interest of the Company and its shareholders," Ciena Executive Chairman Patrick H. Nettles said in a news release.
Nonsense, say the critics.
"This is simply a tactic by companies to lower their expenses and artificially inflate their earnings," said Bear Stearns analyst Chris Senyek. "It's smoke and mirrors." In a recent report, Senyek identified 439 companies that had sped up stock-option vesting as of late last month.
Senyek said moves such as Ciena's make it harder to compare companies because some have accelerated options vesting while others have not. He also said it makes it tough to gauge, at least in the short term, a company's earnings potential, a key measure for prospective investors. That's because while a company may recognize little or no option expense in 2006, it could still issue new options that would drive up expenses by an unknown amount in future years.
Paul Hodgson, senior analyst the Corporate Library, a research firm, put it more simply. "It's lying," he said. "It may be legitimate lying, but it is nevertheless lying to shareholders about the cost of options."
In addition to Ciena, companies with major operations in the Washington area that avoided the most expenses by accelerating options include Applera Corp., parent of Rockville biotechnology firm Celera Genomics. Applera said it wiped away $108.1 million in potential expenses over the next three fiscal years -- a significant savings for a company whose two units reported combined profit of about $40 million in the quarter ended Sept. 30.