Broadcom’s Stock Option Costs Soar
As an optimistic symbol of the technology industry’s future, Broadcom Corp. in the late 1990s was hard to beat.
Stock options turned average workers into millionaires, and the founders established themselves at the top of Orange County’s corporate and philanthropic elite as the Irvine chip maker’s share price soared.
But eight years after its frothy debut on the public markets, Broadcom is fast epitomizing the industry’s cavalier past -- and more sober prospects.
On Friday, the company said unreported expenses related to those stock options that peppered the employee parking lot with Ferraris and Lamborghinis are likely to swell to more than $1.5 billion and ultimately could be “substantially more.”
The revision is double an estimate of two months ago and would increase Broadcom’s accumulated losses since going public in 1998 to more than $7 billion. It’s also the largest restatement among any of the more than 100 public companies under scrutiny over alleged manipulation of the timing of stock option grants.
Although technology companies were more likely than other firms to grant stock options as incentives for rank-and-file workers as well as executives, questions about the practice are being raised at a number of companies -- including Home Depot, Cheesecake Factory, Cablevision and UnitedHealth.
In many cases, experts believe, nothing illegal was done, although the Justice Department is examining more than 45 companies and the Securities and Exchange Commission is reviewing more than 100. Two former executives of Brocade Communications Systems Inc. in San Jose have been charged with securities fraud.
No one at Broadcom, which makes communications chips designed into cellphones and digital entertainment systems, has been accused of wrongdoing, and the company said it was cooperating with an informal investigation by the SEC.
“Broadcom seems to be one of the more aggressive companies in advancing its internal investigation,” said Michael D. Cohen, research director for Pacific American Securities in San Diego. “It’s concerned about not wanting to be the poster child in the industrywide scandal.”
Broadcom said its internal investigation, which uncovered $750 million in unreported compensation expenses two months ago, identified additional options linked to dates other than when they were actually awarded. So-called backdating involves timing options to dips in the stock, creating a greater likelihood of a lucrative upside.
As a result of the investigation, Broadcom is restating all of its financial reports back to its initial public offering in 1998. It said all changes involved alterations to bookkeeping accounts that did not affect the company’s cash position or financial stability. The company has more than $2 billion in cash and short-term securities and has been profitable since 2004.
All together, Broadcom granted options for 238 million shares of common stock to employees over more than five years -- with 95% going to employees other than executive officers. The company said no board member received options -- including co-founders Henry T. Nicholas III and Henry Samueli, who became billionaires from their stakes in the company.
Spokesman William Blanning said Broadcom would not comment beyond a news release issued early Friday before financial markets opened. Broadcom shares fell 34 cents, or just over 1%, to $26.09 -- about half their 52-week high of $50 and far from their split-adjusted all-time high of $182.41.
“This is almost old news,” said Marc A. Siegel, research director at the Center for Financial Research and Analysis. “People investing today are looking forward.”
It was Siegel’s report last spring that identified Broadcom and others as granting options with questionable timing.
“These kind of things in and of themselves do not affect cash. There’s no economic damage,” said analyst David Wu at Global Crown Capital in San Francisco. “But it does show how fast and loose they were playing, giving out options on a very liberal basis.”
Broadcom was a typical young high-tech company caught up in the exuberance of the 1990s. Founded in 1991, it used stock options to attract engineering talent and supplement the relatively low salaries common at emerging companies.
When tech was the darling of Wall Street, Broadcom was one of the stellar stocks. During those giddy days when investors chased anything that ended in .com, Broadcom had something unusual: real products and a solid business plan selling chips that ran TV set-top boxes and wireless devices.
And it had Nicholas.
Brash, bright and seemingly always awake, Nicholas pushed the company into a range of new niches, negotiating late-night deals and using the company’s high-priced stock to buy 18 companies in two years.
By 2000, Nicholas and Samueli, the chairman, had amassed a net worth that Forbes magazine estimated at $10 billion each, most of it in Broadcom stock. But the next year, as the tech economy burst, Broadcom shares plummeted 92%, taking most of the co-founders’ assets with it. Their net worth in 2001 was pegged at $2 billion each.
By 2003, Nicholas, known for extravagant parties at his sprawling Laguna Hills mansion, found himself nearly burned out and almost divorced. He quit the company to reconcile with his wife.
Samueli, who remains chairman, has donated more than $160 million, mostly to educational and healthcare institutions. Two engineering schools are named after him, one at UCLA and one at UC Irvine, and a center for alternative medicine at UC Irvine is named for his wife, Susan.
Broadcom plugged away, hiring Scott A. McGregor as chief executive from Royal Philips Electronics in 2004. McGregor shed stagnant businesses and pushed into more promising markets. Today, Broadcom’s chips are found not only in cable TV set-top boxes and cellphones but a host of mobile and broadband products.
“The promise of Broadcom in the late 1990s is still there today,” said Cohen, who has followed the company since its early days.
He noted, though, that the corporate culture had changed since the aggressively competitive Nicholas quit as chief executive.
“It’s still highly competitive,” Cohen said. “But the nature of those go-go years and the high-flying stock affected things differently. You had to be the first charger into the market then. Now it’s a little more business-as-usual atmosphere.”
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