Options Trouble Punishing Tech

Saturday, July 22, 2006 | 11:37 AM

Back on July 11th, we warned that Options were going to be a key trouble spot for stocks:

Options  Options  Options:  Between the option backdating scandals, and more recently, "spring-loaded options," we haven't even discussed the expensing of options. (Options expensing are a large part of the reason tech stocks have gone nowhere). Options, in all their myriad forms, are weighing on equity prices.

That seems to be playing out as pretty much as planned. The backdating scandal is more widespread than imagined (more than 2,000 public companies).

Ordinary options expensing is taking its toll also: Funny thing is, back in late 2004 I got into a debate with Cody on Options expensing, saying "Look out below:"


Look Out Below
12/16/04 3:19 PM ET

If you have been looking for an excuse to dump any Nasdaq issues, the new FASB rules on Stock options is it.

Regardless of your views on this rule, it now makes a slew of equities much much more pricey. All of your favorite former high flyers from the 1990s -- it turns out that they were never really all that profitible -- assuming they have to expense stock options like they are supposed to . . .       -Barry Ritholtz   


Confused by Post
12/16/04 3:32 PM ET

Hey, Barry, I'm confused by your post. Are you proclaiming the end of the tech bull run here? "Look out below"? I ask because I was under the impression that you've been bullish about tech and the markets in general, per your column the other day about all the money you see on the sidelines.

Color me still cautious but not because of some regulations about how to count numbers
-Cody Willard


No, not the end of the world
12/16/04 3:53 PM ET

Cody, There's a reason that so many tech firms have been lobbying against this rule change. Many firms that managed to show profits in the 90's turn out not to be so profitible after all, if you count what they spent on options / share repurchases.

Any of the firms (typically tech firms) that issue a lot of stock options are going to see their balance sheets get rather ugly next year. Taking these charges means a lot of companies that used to have reasonable P/Es will look far less cheap next year.

Stock options are no longer off balance sheet -- they are an expense that must be fully and transparently accounted for . . . and that may leave a mark on quite a few balance sheets.  -Barry Ritholtz   

Dumping tech in 2004 turned out to be pretty good advice (not that the bulls would ever admit that).

If you want to see how disproportionately stock option issues have been hitting tech, today's NYTimes has what is probably the best graphic depiction of the trouble as it applies to Silicon Valley in particular:

25 Tech Companies with Options Issues:


Graphic courtesy of the NYT


Consider the mass delusion of the period:  It reveals how truly disconnected from reality even (supposedly) sober thoughtful professionals like Lawyers and Accountants became in the mania:

"The practice of backdating options dates to the early 1990’s but took on momentum during the frenzied days of the Internet era, when the competition for available talent was fierce. Numerous Silicon Valley insiders described the practice as routine — so much so that the universe of technology companies ultimately placed under the microscope may well far exceed the dozens already under scrutiny by the Justice Department or the Securities and Exchange Commission, if not both.

“People out there really duped themselves into thinking they were doing this for the benefit of stockholders when in reality they were defrauding them,” said Pearl Meyer, a managing partner at Steven Hall & Partners, a New York executive compensation firm that has worked with scores of Valley-based companies. “Talking to people out there, they clearly viewed this as a victimless crime.”

There is little doubt that Silicon Valley provided the perfect setting for cutting corners. The heady days of the tech boom gave many a sense of entitlement, if not also a sense that they were the primary force keeping America strong in the world economy. It was also a maverick culture where clever ways of gaming the system were admired rather than excoriated.

“There’s been a lot of stuff going on in the Valley since the 1990’s that has been pretty fast and loose,” said Michael S. Melbinger, an executive compensation lawyer at Winston & Strawn in Chicago. Compensation plans were adopted “during the dot-com boom and bust,” he said, “that were just sloppy at best.”

Few outsiders scrutinized these practices, though, and some were unaware of them.

Backdating was often “a client-driven strategy with the accounting firms saying, ‘Sounds O.K. to me,’ ” said Allan Koltin, the president of PDI Global, a consulting firm based in Chicago that works with many large accounting firms. “The client put the suggestion out there and the accounting firm, if they were smart enough and could figure out how to agree with the technology firm’s perspective, they pretty much won themselves a new client.”

Astonishing . . .


Silicon Valley Firms Scrutinized on Stock Option Policies
NYTimes, July 22, 2006

Saturday, July 22, 2006 | 11:37 AM | Permalink | Comments (9) | TrackBack (0)
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Completely agree on the issue ..... But , that's a lot of data mining if you use Dec 2004 through today ..... QQQQ has been everywhere in that time frame , anyone can use any time frame to make an argument .... could've used Oct 2004 until April 2006 for 40% gain .... everyone's holding period is different ..... have you been short the QQQQ's this whole time ??? I commend you if you have

Posted by: EdE | Jul 22, 2006 1:04:48 PM

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