Executives benefit from Street smarts

By Larry Dignan
Special to CNET News.com
June 5, 2001, 4:00 a.m. PT

Would you rather be Mark Cuban or Toby Lenk?

For those who follow the dot-com world, the answer to that question is easy. Most would choose Cuban, the former Broadcast.com honcho who sold his

	When cashing out makes sense Bob Davis, vice chairman, Terra Lycos

Cuban went from paper billionaire to the real thing after he swapped his stock certificates for greenbacks. He bought the Dallas Mavericks and now has so much money that he doesn't sweat the $500,000 in fines he owes the National Basketball Association for bad behavior.

Lenk, on the other hand, did the opposite. The eToys CEO believed in his company so much that he hardly cashed in any stock options. His optimism cost him about $600 million in paper wealth as his online retail company descended into bankruptcy a little more than a year after its market peak.

Although some people seem disappointed with Internet CEOs like Cuban for selling their companies and cashing out, financial planners say these executives are simply following the kind of prudent strategies recommended for any investor, large or small. In the old days, stockbrokers advised clients to sell if they made 20 percent on an investment, a fraction of the exponential gains seen at the height of the New Economy boom.

Many top executives realized that the dot-com euphoria of 1999 and early 2000 couldn't last forever. They diversified some holdings to avoid keeping all their eggs in one basket--and to steer clear of the path taken by Lenk, who could not be reached for comment on his investment strategies.

"When you garner financial independence, it makes no sense to put it at risk again," said David Diesslin, a financial planner in Fort Worth, Texas, who says it's senseless to begrudge those who took some profits.

"Dot-com executives weren't the ones who bid up the stock prices," he said, alluding to day traders and individual investors who fed the frenzy.

Perfect timing
Lost in the relentless headlines about the dot-com meltdown is a notable list of winners who did fine, often benefiting from the merger mania that seized Web companies trying to grab as much traffic as possible at virtually any cost.

Former Lycos CEO Bob Davis sold more than 3.45 million shares worth about $72 million late last year, just months after his search engine was bought by Spanish Internet company Terra Networks, according to regulatory filings. Also in 2000, Eric Greenberg, founder and director for Scient, sold nearly 3.2 million shares with a value of $168.5 million, a sum well above the Internet services company's market capitalization today.

And chances are you'd do the same if you suddenly found $100 million in paper profits sitting in your lap. Why risk your future on one stock?

As Diesslin said, "At some point you have to protect yourself."

Cuban, who witnessed the software, networking and PC stock bubbles in the '80s and '90s, said he knew the dot-com euphoria couldn't last forever. Shortly after the Yahoo-Broadcast.com deal closed in July 1999, he used hedging techniques to minimize losses from his options and sell his shares.

Contrary to popular belief, Cuban didn't cash out anywhere near the all-time highs. When he sold his stock, Yahoo shares were trading around $90, well short of the $250 high they hit a few months later. But Cuban's not shedding any tears.

"It didn't take any genius to figure out what I needed to do," he said in an e-mail interview. "It wasn't so much a diversification strategy as an 'avoiding-the-crash' strategy."

Harold Evensky, a financial planner in Coral Gables, Fla., said such first-hand experience with previous market busts is what saved some people who might otherwise have gambled their fortunes on the future. Many workers in Silicon Valley, especially younger ones, had never seen a recession and lacked the kind of risk meter that might have compelled them to sell at least some of their holdings before they collapsed.

"The idea is to put a big chunk aside so if it all falls apart, you'll be set," said Evensky, who added that economic manias usually have ugly endings. Evensky recommends that executives not have more than 5 percent of their personal net worth riding on company stock.

Financial planners acknowledge that not all executives can cash out at once. That can create political problems within corporations and can hurt a company's standing on Wall Street, as well as raise speculation about insider trading violations.

Thus, many executives, such as Microsoft Chairman Bill Gates and eBay CEO Meg Whitman, exercise and sell stock options at regular intervals to minimize scrutiny and speculation.

The key for financial planners is flexibility. Executives who took profits ahead of the dot-com train wreck now have other kinds of options--options to send their kids to college, options to choose a new career, and options to fund a new business venture.

"Taking care of your family is far more important," Cuban said, adding that he would have second-guessed himself forever if he hadn't cashed out. "As someone who has traded stocks for a long time, I'm a big believer that no one ever got in trouble for taking a profit."