These have been trying times for KLA-Tencor
On May 22, The Wall Street Journal published a story alleging that the company is implicated in the options-backdating mess. This widening scandal continues to punish unlucky investors, and currently has ensnared stockholders in VitesseSemiconductor
So, what is all the options-backdating brouhaha?
When stock options are awarded to employees, whether the employees are executives or lower-level folks, the strike price of the options is normally set equal to the share price on the day of the award. In this way, the executives of a company are supposed to have their interests aligned with the shareholders -- if the stock price rises, employees benefit in tandem with the shareholders. Amazingly enough, executives at some companies were given options grants that often occurred on the very day that the share price bottomed after a steep decline; the stock then immediately began a sharp increase.
While such fortuitous timing is possible, the Wall Street Journal has found that it is extremely unlikely. The paper believes that it's much more likely that the date of the grant was changed after the fact. This behavior, if true, amounts to theft from unfortunate shareholders, because it unfairly transfers a big chunk of shareholder equity to insiders from those investors who purchase shares with their own hard-earned money.
Beyond the theft, there are other ways for shareholders to lose when this type of (alleged) malfeasance is exposed. The most obvious: an immediate drop in the share price. KLA shares received a 6% haircut on May 22.
And KLA shareholders may be losing out yet another way. The company announced today that KLA is modifying its purchase agreement for ADE
KLA has decided to change its purchase agreement from an all-stock transaction worth $488 million, announced Feb. 23, to an all-cash transaction worth $32.50 per ADE share. If you look at a chart of KLA's share price, it isn't hard to understand why the offer has been changed. On the day of the merger announcement, KLA shares closed at $51.93, but lately, they have been flirting with $40. As KLA's share price has wilted, so has the price that ADE shareholders would receive for their company. Although KLA's shares were under pressure before the Journal's article, I have to wonder whether the latest decline caused by that column finally pushed ADE's board to ask for a better deal.
If you subtract ADE's cash balance and add its small amount of debt to the purchase price, you find that KLA is paying around $400 million for ADE -- probably not a bargain price, but not unreasonable for a company that dominates its market, and has strong margins and good growth prospects. It's also a price that KLA can easily afford, given that it has more than $2 billion in cash and marketable securities. Nonetheless, it may be a higher price than it had to be.
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