Thursday, August 17, 2006

Cisco Stock Options Hurt Stockholders

Is there an inconsistency between a significant stock buyback plan and an overly generous stock option program? In May 2004, Cisco Systems announced that its board authorized up to $5 billion in additional stock buybacks, bringing the networking company's stock buyback program to $25 billion. At about the same time, Cisco’s CEO, John Chambers, began a planned sales program of Cisco stock shares. Since then, Chambers has pocketed $109 million in net proceeds by selling more than 9.4 million Cisco shares.

http://www.thestreet.com/_yahoo/newsanalysis/technetworking
/10304330.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

And just this week Chambers sold $10.7 million of Cisco shares by exercising stock options and selling the shares after the exercise of the options. Chambers sold 1.3 million shares after exercising 1.35 million options at $12.27 per share. Is it just a coincidence that his exercise and sale came just nine days after he raised the 2006-07 sales forecast for Cisco? In addition to the ethical and perhaps legal issues related to Mr. Chamber’s upgraded sales forecast, owners of Cisco shares should question how a stock buyback program, purportedly designed to add to shareholder value, actually fills the bank accounts of its management team.

Cisco has been a leader in opposing accounting for stock option on financial statements. Mr. Chamber’s actions show why Cisco has been out front in resisting this movement. Mr. Chambers is now only mid-way through his four year selling plan intended to unload $300 million worth of stock. Mr. Chambers argues that he is being rewarded for performance. However, in May 2004, Cisco shares sold for $22.37. Today Cisco closed at $21.10 and has never paid one penny of dividends. Thus, the stock buyback program has failed to boost shareholder value, but has successfully made Mr. Chambers an even richer individual.

Disclosure note: I sold my shares of Cisco last week. EPG

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