Thursday night, I received a holiday greeting from First Data (NYSE:FDC), the parent company of Western Union. Actually, I should say I received an email with a link to its 8-K filing with the Securities and Exchange Commission. On opening the file, I was extremely disappointed. I felt the way you feel when your child does something that, while technically legal, left a lot to be desired on the "doing the right thing" scale.
First Data is one of my picks for the Motley Fool Inside Value newsletter, and in most respects, I think it is an excellent company. My extreme disappointment relates to its decision to accelerate the vesting of all employee stock options under its 2002 plan. What this means is that instead of waiting for the options to become exercisable as per the plan schedule, employees -- and particularly executives and directors -- can exercise them immediately.
This is a marginal advantage to employees, since the exercise prices are currently not far below the share price, but what really got my goat was the company's stated reason for its action:
The decision to accelerate the vesting of these stock options was made primarily to reduce share-based compensation expense that otherwise likely would be recorded in future periods following the Company's anticipated adoption in the first quarter of 2006 of Statement of Financial Accounting Standards No. 123(R).
Let's be clear. FAS 123R was designed to provide a more transparent view of the true expense of employee stock options by requiring companies to expense them on the income statement beginning in 2006. What First Data has done is to avoid having to record a net $120 million ($0.16 per share) of stock option expenses in future periods. In other words, the company is thwarting the attempt at greater transparency for investors. Any new stock options granted will be expensed as they vest, but for a time, First Data's earnings per share will look better than they would have.
You might think that $0.16 a share over several periods is not a lot to be worried about, and you'd be right. It doesn't affect my valuation of the company or my estimation of its prospects. It does, however, tell me something about the board and the executives who deem it worth fiddling with the stock option plan to dress up future income statements.
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Philip Durell is the advisor/analyst of theMotley Fool Inside Valuenewsletter. You can join Philip aboard Inside Value for free with a 30-day trial, which gives you full privileges to the service (including his top picks for new money now). Philip's wife owns shares in First Data. The Motley Fool has a disclosure policy.
