Monday, June 27, 2005

Extreme compensation scheme

EXTR accelerated option vesting for some 4.5M shares, which is 21% of outstanding options. What is amazing is that this accelerated dilution is to avoid "expense in fiscal years 2006, 2007 and 2008." This amounts to about $11.43M of "free money" paid-for by all of the current shareholders. And get this, "the Compensation Committee believes that this action is in the best interests of Extreme Networks' stockholders". I do not how that creates any thing for current shareholders. If you bought the stock at anything above $7 (that's the price of options that are being accelerated vesting) then you are down 40% and these employees/management gets to erase that lose. Maybe I am naive but seems like its more about employee-interest than shareholder interest. Its not like these employees are new, these folks have been there years and the stock price reflects their efforts (sorry to sound so blunt).

This might be a way to raise employee morale, and yes a lot of other companies have done this in the past but it is still dilutive for current shareholders, and if I was one of them I would be furious after this. The only positive I see from this is that it might indicate that management believes stock will move up from here to get these options in the money. But you never know, they might get bought out.

FD: Author has no position in EXTR


Anonymous Anonymous said...

Assuming the acceleration, like most accelerations included only those options under water, then you have absolutely no complaint and the action is to benefit shareholders by preventing future expense. Underwater options will never be converted to stock without a dramatic rise in the stock's price. Howver, under the new expensing rules the value of the options was set when it was first issued at the higher price.

Ask yourself if it makes sense to take those old values into expense and lower EPS. Ask yourself if it was fair to change the rules in the middle of the game and not to granfather those options issued before the new FAS was imposed.

5:37 PM  

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