OUR TAKE
Voting Against eBay
Hoping to keep share dilution down

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By Jeff Fischer (TMF Jeff)
May 30, 2003

It's that time of year when, as a shareholder, you're receiving annual reports and proxy statements in the mail. Hopefully, you're reading each new proposal offered by your companies, forming your opinion, and voting accordingly before the company's annual meeting. I just called in my votes to eBay (Nasdaq: EBAY). I rejected the recommendation of the board and voted soundly against one proposal.

The proposal? To increase the number of stock options that eBay may issue to employees, directors, and consultants by 14 million shares, or 56%. Why vote against this proposal? Because eBay has already been one of the most generous (perhaps to excess) issuers of options in the last few years, and this increase would portend more of the same.

Last year, eBay's net option grant to insiders was greater than 4% of its outstanding shares, effectively diluting all common shareholders by that same amount. Yes, shareholders saw their participation in the company's earnings power erased by 4% last year alone. And there's more ahead.

As 2003 started, unexercised stock options held by eBay employees already totaled 12% of the company's outstanding shares. So, there's already big dilution potential coming down the pike. Given this, it's hard, as a shareholder, to vote in favor of still more dilution. So I didn't.

At a time when other companies, including Yahoo! (Nasdaq: YHOO) and Intel (Nasdaq: INTC), are making promises to keep annual stock option dilution at 2% or less of outstanding shares, eBay is proposing a significant increase (at least 4% dilution) to its option granting program for the third year running. Its argument is tepid: It needs to grant options to attract and retain employees. In moderation, we'd agree, but....

Granting shares so excessively is suspect because: (1) eBay is a healthy company in an unhealthy economy, and surely attracts plenty of applicants; (2) eBay has $1.5 billion in the bank and counting, and is profitable, so it can pay additional cash to retain employees; (3) eBay is hardly a startup that needs to grant "promising" stock options in "generous" amounts to retain talent.

Additionally, consider the numbers: eBay employs 4,400 people around the globe. If it could grant another 14 million shares of its stock to employees, as it proposes, that would come to 3,181 shares per employee (assuming life were so fair). At current prices, that's $318,000 in gross proceeds per employee. (Net proceeds would be lower based on exercise prices.)

An article on eBay's options on TheStreet.com suggests that the company may be trying to grant options in advance of a possible FASB ruling that companies must expense them. That ruling is about a year from a decision, however, leaving today's dilution issue entirely up to shareholders' votes.

Share your thoughts on option grants on the eBay discussion board. (Jeff Fischer owns shares of eBay.)

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