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Maxim Integrated Products, Inc. Message Board

  • pvhu pvhu Aug 16, 2006 2:27 PM Flag

    Not accelerating vesting is foolish!

    CEO Gifford refuses to accelerate Maxim's out-of-money options, because it would be "unethical".
    This decision is costing Maxim a fortune in options expenses under SFAS 123R.
    Look at Analog Devices 10Q of 8/15/06.
    They accelerated vesting of options with exercise prices of over $40 per share.
    "The primary purpose was to eliminate the need to recognize the remaining unrecognized non-cash compensation expense of these stock options as measured under SFAS 123. The approximately $188 million ($134 million net of tax) of future expense associated with these options would have been disproportionately high compared to the economic value of the options at the date of the modification."
    This is a very clear, logical statement by ADI, nothing unethical about it. And it increases their after tax profit by $134 million.
    This is a major reason why Maxim's GAAP profits are 22% lower than non-GAAP, versus about 10% at ADI, 8% at LLTC.

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    • Agreed. Desipte what I see here, the fact is Maxim down far more than it's peers.
      If anyone thinks that long term this will be good for Maxim I'd like to hear how.
      Paying less taxes cause you made less isn't a viable market strategy in my book.

    • Good point. These were options that were already expensed once, turned back in for RSU and then expensed again. Double expensing!

    • Looking,
      The RSU exchange was only for options that are already vested.

      "1.67MM options did not vest"

    • And, using your numbers, 1.67MM options did not vest, which should have more than offset the RSUs that vested last quarter. The options would have had significant value, using the Black Sholes pricing model, despite being priced well above current market value.

      The bottom line is that the expense should have been reduced, not increased, and certainly not increased by 25%.

      That was the whole point of the RSU for ESO exchange.

    • The expense rose from ~$40M to ~$50M in Q4. The RSU's employees traded are vesting over 4-6 quarters. That means that each quarter the company must buy x shares and give them to the employees. This cost is in addition to the cost of any options that are (from 10 years ago, $12 &) being exercised in Q4.

      About 10M options were converted to ~2M RSUs. Most are on the 6 Qtr vesting plan. Each Qtr 333K RSU need to be granted. At $30/ea that costs $10M.

      "Shouldn't the expense have been reduced by the RSU exchange? "

    • So why was their option expense so high last quarter?

      Shouldn't the expense have been reduced by the RSU exchange?

    • As I said: for 10 years option expenses were 40-60% of profits as reported in Annual Reports.
      This was true for most high tech companies I follow, including Cisco, Intel, etc.
      This statement was not specific to Maxim.
      But they have RSU's, where typically 5 options were exchanged for 1 RSU, obviously reducing options expenses.
      The last approval at Maxim of increases of shares for options was nearly a year ago.
      I don't think they are going to come back with similar increases this time - 1 1/2 to 2 months from now.

    • Besides a potential big ego on Jack, I do think that he has a point not to accelerate. GAAP numbers are just a perception to the street and has an impact on short term stock price. However the long term stock value is not affected when he accelerate or not. The earning power and cash on MXIM account is still the same.

      An accounting question: we all know that the current way of expensing stock option is not very accurate or reasonable. Does company pay income tax according to GAAP earning? If so, over expensing for stock option may save company some tax, thus create better cash position.

      I think company should significantly reduce giving away stock options, and stop stock buyback. I would rather give employees more cash bonus according to their performance. Stock option is not a fair way to compensate employee. FASB should change their rule to force company expense stock buyback.

      It does not make sense to me for a company to buy back stock and not taking it as expense. The earning should be a measure of how much money a company can make. The profit should either go to company's book or goes to shareholder as dividend. If you buy back shares, the money is gone. It's spent. It should be counted as expense because that is the only way the company can take to limit inflation of total share numbers.

      For example, it company X makes 1 dollar per share a quarter. It uses that 1 dollar earning to buy back shares, and gives the same amount of stock or stock option to its employee. The net result is that the total share amount remain the same. Because all earnings of 1 dollar is spent to buy back shares, the company always have the same amount of cash in its book. If I am a sharehold who holds 1% of the company, I will keep being a 1% shareholder for the same company. So the earning power of the company to me is ZERO. To me the company earning should be zero instead of $1 per quarter.

      Besides the idea of expensing stock buy back, the way of giving/expensing stock option should be changed. Option should be considered compensation to employee from shareholder. By giving stock option to employee, regular shareholders are taking the hit of dilution, thus shareholders should be compensated. The expense on stock option must be real and distribute that expense to shareholders. For example, let's assume Maxim spend $20M this quarter for stock option. Maxim should take this $20M out of its book and distribute it to all shareholders. The cash a shareholder get should offset the loss of dilution effect.

      By adopting these two rules (expense stock buy back and distribute option expense to shareholders), the earning number will reflect the real earning power of a company. If a company earns $1 in this quarter, it will have $1 more on its book.

      • 3 Replies to yxie_95630
      • "...It does not make sense to me for a company to buy back stock and not taking it as expense. The earning should be a measure of how much money a company can make. The profit should either go to company's book or goes to shareholder as dividend. If you buy back shares, the money is gone. It's spent. It should be counted as expense because that is the only way the company can take to limit inflation of total share numbers...."

        If a company spends $100M of its excess cash, there is no real difference between it being distributed as cash dividends or spent to buy back stock, reducing share count. If all of the dividends received by existing shareholders were re-invested in stock the result would be equivalent to buying back stock. If stock is bought back, the shareholders can each sell enough stock to extract the equivalent of the cash dividend. It is then only necessary to undertake a meaningless fractional forward or reverse stock split to restore the share count.

        Therefore, expensing stock buybacks woukd be equivalent to expensing cash dividends.

        However, The real problem has always been that stock buybacks not only appear to be free, but are applauded by Wall Street, no matter the price and valuation.

        When a company uses either stock or options to increase the outstanding share count, it is diverting future dividends from existing shareholders. When it buys back stock, it is also diverting future dividends by spending the cash that would otherwise have been distributed as dividends.

        This diversion of future dividends is what should have been accounted for, rather than proceeding into the insanity of accounting for option grants, in addition to the existing mistake of expensing stock grants.

        Expenses relate to an actual business and its viability and dividends relate to the returns to shareholders. Mixing up the two categories is the worst of all worlds.


      • Companies indeed pay less tax under GAAP.
        In Maxim's case, they paid $16.8 million less tax under GAAP because of stock based compensation, in Q4'06.
        Net income (GAAP) was $34.5 million lower than non-GAAP in Q4'06. Without the tax savings, it was $51.3 million lower.
        But more and more analysts consider GAAP earnings now. The next report in October will be the first one, where Q1'07 will be compared to Q1'06 - and both will include stock options expensing.
        The comparisons to the previous year will be valid.

      • Right!

        Why not just GIVE the entire company awy to shareholders to stop their LAWSUIT!

    • Agreed... accelerating vesting for underwater options would have been a good idea. But, right to the end, Jack was convinced he would be able to prevent the decision requiring expensing of ESOs. He was wrong.

      It was not "ethics" on Jack's part that prevented it, however. That was probably the furthest thing from his mind.

      He was afraid that, if the vesting was accelerated for all of those options, employees would have no incentive to produce -- the handcuffs would be off. The joke is that, vested or not, all options above $40 are virtually worthless now to anyone but the FASB!

      Unfortunately, it is too late to do anything about it now, because they would have to be expensed, anyway, all in the quarter that they vested. And many of them have been converted to RSUs.

      • 1 Reply to lookingforabuy
      • Give lookingforabuy a prize, well at least for half the message. Jack did not expense options because he thought MXIM would be >$60 today and the handcuffs would would be on again. He has called it wrong big time a should be held accountable.

        Jack thinks highly of himself but not to the degree that he would be able to stop expensing. He was too myoptic, he can't believe that logical thinking would result in expensing.

    • Perhaps Maxim's management team wants to see a lower stock price.

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