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Tech Industry Challenges Reform

Silicon Valley's opposition to expensing options will be tested Wednesday in a vote by Intel shareholders.

May 20, 2003|Michael Liedtke | Associated Press

Silicon Valley companies are making a defiant last stand against an accounting reform that could cost them billions in paper profits by requiring them to treat their employees' coveted stock options as expenses.

The practice is being adopted by more than 200 companies across the country, but some of the biggest names in high-tech are holding out. The resistance movement faces a critical test Wednesday at Intel Corp.'s annual meeting.

A shareholder proposal recommends that the chip maker start counting workers' stock options as an expense. Intel's management opposes the measure.

"This is a serious issue that should not be made trivial," Intel Chairman Andy Grove wrote in a May 7 letter to shareholders. He said Intel's record should "not be buried in a blanket referendum on corporate America."

Similar proposals were put to votes by shareholders at three other tech giants in Silicon Valley, winning approval at Apple Computer Inc. and Veritas Software Corp. and losing at Yahoo Inc.

Apple and Veritas said they won't make the accounting change until they get further guidance from the Financial Accounting Standards Board, which sets national accounting rules and is considering new rules for stock options.

Shareholders at 16 companies outside the Silicon Valley have approved similar measures favoring option expensing so far this year, according to Institutional Shareholder Services, which advises on corporate governance issues.

Supporters of the reform say stock options do carry a cost that needs to be recognized on a company's books.

Tech companies have the most at stake, since they often are much more liberal in granting options to employees.

Typically, options give a recipient the right to buy shares at a locked-in "exercise" price. The options become increasingly valuable as a stock's market value rises above that price.

Options generally aren't counted as part of a company's operating expenses, and thus have no effect on profits, though they do dilute earnings on a per-share basis. And companies are allowed to claim income tax deductions on the gains that employees realize from stock options.

Many companies in Silicon Valley insist that expensing stock options is a bad idea, in part because there is no precise way to determine their value before they are exercised.

The value depends on how a company's stock performs over time -- a wild card that makes it virtually impossible to expense options accurately.

Many tech companies say the reform would decrease innovation by preventing them from using options to attract top talent.

"I don't think there could be a worse time in America's economic history to adopt such a policy," Menlo Park venture capitalist John Doerr told Robert Herz, who is chairman of the Financial Accounting Standards Board, during an acrimonious discussion this month.

Patrick McGurn, a vice president at Institutional Shareholder Services, said the Silicon Valley companies are desperate to avoid a rule change.

"They are like a cornered animal at this point," he said.

If the stock options of the Silicon Valley's 35 largest high-tech companies had been expensed last year, it would have resulted in a $9.2-billion swing in fortune, according to Associated Press' review of disclosures.

Nationally, the high-tech industry's 2002 operating earnings would have been 68% lower than the reported figures if stock options had been expensed, according to a study by UBS Warburg.

No other industry would have suffered an earnings decrease of greater than 11%, the study found.

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