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Todd Sullivan
Todd Sullivan

Salesforce’s Multi-Billion Dollar Dilution…

July 31, 2012 | About:

This is amazing. Shareholders are being bled to death by the constant option exercising by management. Now, as we have noted relentlessly via twitter most of the option exercises by management are being done 1-3 years before the options expire (they are cashing out early). Table II in this example will tell you when the option expired vs date exercised. If you are one to believe managements actions tell you what they think of the stock price, you might want to think about that. Perhaps even they know share prices are unrealistic?

We talked last week about their “Goodwill” and how we are mystified that there have been no writedowns to the exploding metric despite the acquisition binge they have been on resulting in only increased GAAP losses.

Let’s look at “stock based comp” today. This is compensation given to executives in the form of stock rather than cash. The stock price goes up, the value of their stock options/grant goes up.

When used responsibly, it give execs incentives to make decisions that in theory are best for shareholders since a chunk of their comp is tied to the share price. We have also seen countless examples where their practice has lead to accounting shenanigans that have in the end left shareholders holding an empty bag once execs have cashed out.

From the most recent 10Q pg 35:

Stock-Based Expenses. Our cost of revenues and operating expenses include stock-based expenses related to equity plans for employees and non-employee directors. We recognize our stock-based compensation as an expense in the statement of operations based on their fair values and vesting periods. These charges have been significant in the past and we expect that they will increase as our stock price increases, as we hire more employees and seek to retain existing employees.

During the three months ended April 30, 2012, we recognized stock-based expense of $81.3 million. As of April 30, 2012, the aggregate stock compensation remaining to be amortized to costs and expenses was $888.1 million. We expect this stock compensation balance to be amortized as follows: $255.2 million during the remaining nine months of fiscal 2013; $292.4 million during fiscal 2014; $232.8 million during fiscal 2015, $105.1 million during fiscal 2016 and $2.6 million during fiscal 2017. The expected amortization reflects only outstanding stock awards as of April 30, 2012 and assumes no forfeiture activity. We expect to continue to issue stock-based awards to our employees in future periods.
$881M still to be amortized. That means at current share prices (April 30th) shareholders can expect $881M dollars of additional stock to be dumped by insiders. When you market cap is $17B, that comes to ~5% of your current market cap. Here is the kicker, that number is only the tip of the iceberg.

See below:


Yup, 36M more share are waiting in the wings to be doled out. THAT is the equivalent of 24% additional shares being dumped by insiders or another $4.5B shares. Now, why do I say “dumped”. What if insiders get these options and exercise them and hold shares? Many companies do this and when the option is exercised the employee sell just enough to cover the tax nut and keeps the rest. Well, is that what is happening at CRM?

Sadly, no. Not only are they exercising the options early (some as many as three years early as noted above), but in virtually every single instance, every share is being sold. I say “virtually” because I may have missed one instance they didn’t sell them all but I have not found one…. Here is the Form 4 (insider activity) list for CRM, if you do not believe me, go through yourself. In fact not only has an insider NOT bought a share in over three years, as a group they have sold $476M in stock.

So, when management sits there and tells you how bright their future is, how exciting the opportunities are and what amazing potential CRM has, you have to ask yourself, “if all that is true, why are they mass selling like this?”. Wouldn’t a management group that truly believed in the above do what most folks in a similar situation do? Sell enough for taxes and hold the rest to watch it appreciate. I get insiders sell, they buy houses, have tuition bills etc…..but $476M in sales to ZERO buys? The implication there is not even debatable….

About the author:

Todd Sullivan
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.5/5 (16 votes)


The Science of Hitting
The Science of Hitting - 5 years ago    Report SPAM
$476M vs $0

All I can say is wow...
Sww - 5 years ago    Report SPAM

Some quotes from Buffett


Quotes on Options

Warren Buffett quotes on options. Why Warren Buffett disapproves of options and his thoughts on options backdating.

Options as Executive Compensation

Warren Buffett often states that he does not approve of options. This is because options carry with them a perverse risk-reward system that he does not like. Options gave its holders the potential for significant rewards without any risk – thus, those who hold options have nothing to lose when they are taking business risks and everything to gain. They might thus be more likely to engage in risky behavior that would not be in the interest of shareholders.

In contrast, if management were given shares instead of options, the interests of management and shareholders would be better aligned, as management would then share in both the risks and the rewards of their business decisions.

Limited Executive Compensation

Buffett likes to limit executive compensation in the form of salaries in general, as over the top executive compensation hurts shareholders directly. Thus, the perk of working as a manager might not be the compensation, but this is often outweighed by the significant autonomy that Buffett gives his managers. He is very trusting of his managers and also a good motivator who can get his managers to put in their very best.

Warren Buffett: Options Backdating

The other options-related issue that Warren Buffett has spoken out strongly about is the issue of options backdating. In the past, some companies have retroactively adjusted the grant dates of options in order to increase their value. Apple, for example, discovered issues with options backdating during the Dot Com Bubble, leading to the resignation of Apple CFO Fred Anderson. Buffett argues that regardless of whether this is legal, it is unethical and would not be tolerated in any of the Berkshire subsidiaries.

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