Sagging Novell grants new stock options

The software company adopts the remedy used by rival Microsoft to revitalize millions of employee stock options.

WASHINGTON--Novell has adopted the remedy used by rival Microsoft to revitalize millions of employee stock options.

Novell, a Provo, Utah, software company, awarded executives and employees a new round of stock options on May 4, one day after the company's share price collapsed. Microsoft made headlines in April when it also issued options companywide after its shares declined 16 percent.

With competing software makers vying to attract personnel, both companies faced the loss of key workers unless they found a way to restore the value of employee stock options.

Accounting regulators have clamped down on the most popular method--adjusting previously awarded options--prompting many companies stuck with falling shares to grant employees millions of new securities instead.

"At a lot of companies that are in a position similar to Novell, where they have had a significant fall off on the stock price, the preferred solution is to grant fresh options at the fresh market price," said Mark Edwards, chief executive of iQuantic, a San Francisco compensation consulting firm.

The 16-percent decline in the Nasdaq Composite Index during April hurt employees in many industries--ranging from biotechnology to e-commerce-that use stock options as a primary form of compensation. Options, which entitle the holder to buy stock in the future at a preset price, are worthless to employees if their company's shares trade below the so-called exercise price.

Microsoft, which had options outstanding on 766 million shares at the end of last June, struggled all year under the weight of the Justice Department's antitrust suit. The company then saw its shares drop 16 percent on April 24, the first trading day to follow a company announcement that revenue growth was slowing.

Similarly, Novell shares fell almost 40 percent on May 3, after the manufacturer of net services software, which enables clients to manage all types of computer networks, warned that it wouldn't meet Wall Street earnings estimates. The company attributed the earnings shortfall in part to competition from Microsoft's Windows 2000 and the Linux operating system.

Novell disclosed the latest option awards in insider reports filed with the Securities and Exchange Commission, stating that four executives received options on May 4 to purchase a total of 1.15 million common shares at $10.63 each. That included options on 500,000 shares for Eric Schmidt, chairman and chief executive; and 300,000 shares for Dennis Raney, chief financial officer.

However, these reports are only filed for top executives, and thus disclosed only a fraction of the options awarded. Pamela Mahoney, a Novell spokeswoman, said the company actually awarded new options on May 4 to numerous employees who had received options with higher exercise prices earlier in the year.

While the new option awards don't cost the company any money, the grants do dilute ownership of the company, theoretically reducing the value of stock held by outside investors. At least one major shareholder, though, said the option awards ranked very low on his list of concerns.

"I couldn't care less," said Paul Schupf, who runs four hedge funds under his own name that held a total of 5.3 million Novell shares at March 31. "All that is chump change," said the money manager, whose firm, Paul J. Schupf Associates, is based in Hamilton, N.Y.

In previous years, companies have simply lowered the exercise price of stock options when their shares plunged. However, the Financial Accounting Standards Board on March 31 adopted a rule that potentially makes such "repricings" costly. The new rule, retroactive to December 1998, requires companies that reprice options to take charges when their shares rise that reflect potential stock market gains.

As a result, companies are searching for alternatives to resuscitate stock options without damaging the bottom line.

"Repricing is thought to be ugly by institutional investors," said Arthur Kroll, chief executive of KST Consulting Group, which specializes in executive compensation. At the same time, with the recent decline of the Nasdaq, "There is a tremendous potential here for double awards."

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