Chipmaker Broadcom deserves an honourable footnote in the options backdating scandal for yesterday’s eye-popping revelation that it under-reported its compensation costs by $2.67bn (you have to dig into the fine print to find this full cost, which is higher than most news outlets reported.) That has been followed today by a 4 per cent bounce in the company’s stock. So should anybody actually care about any of this?

Not according to Broadcom, it seems. In a filing with the SEC, it wears the massive size of the option charge as a badge of honour, since:

It … reflects Broadcom’s focus on providing entrepreneurial incentives to its employees, which resulted in a much higher ratio of equity to cash in its compensation program, as compared with those of other, more mature technology companies.

Unabashed, CEO Scott McGregor then tries the opposite tack, minimising the damage by pointing out that only a third of the backdated options were ever exercised or remain outstanding (presumably the two-thirds of the options that were underwater and expired worthless weren’t particularly conducive to the company’s ballyhooed entrepreneurial culture.)

It would be interesting to calculate how much of Broadcom’s profits between 1998-2005 (when the extra options costs should have fallen) would have been wiped out by these charges. Only, it didn’t make any profits. Thanks to the tech bust and another inconvenient accounting charge (to write off goodwill from acquisitions), it actually accumulated losses of nearly $6bn. Like many Valley companies, Broadcom has now shifted more of its compensation from options to restricted stock, so maybe things will get a little less volatile from here - even if the entrepreneurial incentives are not quite so compelling.

January 25th, 2007 in Uncategorised | Permalink