Technology Options Sink—Silicon Valley Considers Repricing but Risks Riling Investors

By Scott Morrison

Wall Street Journal

Silicon Valley is drowning in "underwater" options. But with the
stock market in turmoil, investors might be uneasy bailing out
high-tech employees.

Employees at scores of companies, including Yahoo Inc. and Google
Inc., are holding stock options, the right to buy shares at a preset
price, that have been rendered virtually worthless because those
companies' shares have fallen below the exercise prices.

At chip maker Advanced Micro Devices Inc., the situation has gotten
so extreme the company is planning a shareholder meeting to ask
permission to reprice 99% of its outstanding options. AMD, whose stock
price had fallen about 76% over the past 52 weeks to $3.16 a share at
Friday's close, said this is necessary to prevent key employees from
leaving.

"The vast majority of the historically granted stock options no
longer are effective as incentives to motivate and retain employees," a
company proxy statement said. The date of the meeting has yet to be set.

AMD of Sunnyvale, Calif., is at the leading edge of what promises to
be a contentious issue for Silicon Valley: how to handle underwater
options. Many companies are considering plans to swap those options
with others having lower strike prices, and such plans may be presented
at annual shareholder meetings, beginning in early 2009.

They will likely face skeptical investors, who are still grappling
with a stock selloff that has erased about $8 trillion in market
capitalization since the market hit all-time highs last year. Many are
worried that resetting options will only water down their already
devalued holdings.

"For investors, the wound is deep and the wound is recent," said Pat
McGurn, special counsel at shareholder advisory firm RiskMetrics Group.
"I don't think there is a lot of [shareholder] sympathy for broad-based
repricing."
Stock options have long been central to Silicon Valley's
entrepreneurial culture. A company's ability to hire the sharpest minds
is among its biggest competitive advantages. Options are seen as a tool
to attract talented employees and align their interests with those of
shareholders.

The strategy works well when share prices are rising, creating a
virtuous circle that allows both employees and investors to profit. But
when stocks fall, options become trickier. Employees, who had been
expecting the options to provide part of their compensation, begin
feeling underpaid. Meanwhile, shareholders are reluctant to reset
prices because the stock given to employees dilutes their holdings.

Silicon Valley's current troubles aren't the first time it has
grappled with underwater options.
After the market plunged in 2001, roughly one in 10 tech companies,
including big names such as Apple Inc. and Adobe Systems Inc., offered
workers the chance to swap underwater options for ones with lower
strike prices, according to a San Jose Mercury News survey. Others,
such as Siebel Systems Inc., now part of Oracle Corp., let workers
trade underwater options for cash or stock, exasperating shareholders
because those costs weighed on share prices.

Investor outrage over options after the last downturn prompted
regulators to impose new rules requiring companies to account for
options as corporate expense and seek shareholder approval before
repricing outstanding options.

Now, the problem might be even bigger. More than 80% of Silicon
Valley's 150 largest publicly traded companies had some employees
holding options that had fallen below the strike price as of Oct. 24,
according to Equilar, an executive-compensation research firm. Equilar
said about 90% of chief executives at those companies had underwater
stock options.

Before the recent selloff, a handful of tech companies, including UTStarcom Inc. and VMware Inc., had already

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