Options expensing is set to become a requirement by January of next year. This is a victory for investors, but during the transition you should expect many companies to find creative ways to use the switch to investors' disadvantage. The Fool has devoted several articles to the merits of options expensing, but many in the tech industry, in particular, are vehemently opposed to the idea.
Micron (NYSE:MU), for example, has accelerated the vesting of 44.6 million options, worth around $100 million. That amount is equal to about 64% of last year's net income, by the way. The company is at least honest about what it's doing -- it has stated that the options will vest early "to enable the Company to avoid recognizing future compensation expense." Many other companies are doing the same thing, but not all are as honest about it as Micron.
Here's a new twist on the options expensing game: Imagine a company is going to announce disappointing earnings. How can it minimize the impact to its stock price? Well, how about announcing a week or so before releasing earnings that it will start expensing options immediately?
What? You don't see how this will help?
Consider this real-life example: The company says the options charge will be $0.14 per share for the quarter, resulting in quarterly earnings of $0.90 per share. Nine days later, the company announces quarterly earnings of $0.85, resulting in a $0.05 earnings miss. Ouch! Wall Street doesn't take kindly to that kind of disappointment. Digging into the results, though, shows that the options expense was... no, not $0.14, but $0.10. And you have to really dig. The amount of the options charge was not included in the earnings release.
Stick with me. We're almost done.
Had the company given the true options charge of $0.10 in its earlier guidance, the expectation would have been for earnings of $0.94 instead of $0.90, resulting in a much larger $0.09 shortfall. Double ouch! Traders who respond to the headline number without looking at the fine print would likely lash the company's stock more severely in the latter case.
So, who did this? None other than tech bellwether IBM (NYSE:IBM). It announced earnings last Thursday afternoon, and on Friday the market erased almost $7 from the share price, amounting to more than $11 billion of market value.
Why don't companies that engage in this sort of behavior worry that they erode investors' trust? I wonder what other kinds of tricks and twists await us before options expensing becomes mandatory.
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Fool contributor Dan Bloom hopes his wife will avoid expensing the cost of a new mountain bike on the household finances. He does not own stock in any company mentioned in this article.
