Broadcom Corp. May Be a 'Perfect Payday' Stock

I mentioned Broadcom Corp. (BRCM) several times as having some trouble with options, most recently on Friday. It now turns out the number they “miscalculated” was more like “over $1.5b” rather than the $500m they estimated it at just a month ago. I love to say “I told you so,” and I did—but now I’m going to confuse you by telling you that the sell-off may be overdone.

They didn’t steal money, they stole shares of stock. In fact, the shareholders aren't even any more diluted than they would have been if the options had been priced higher. Yes, they may get sued, but there’s not much merit to the majority of shareholders forcing the company to pay them cash, which will devalue their shares. Ideally, existing officers and directors who benefited should be forced to give the shares back, but it will be very surprising if a Bush balanced Court will force corporate criminals to give anything back to the victims.

The IRS may take issue with what is looking like, on a wide scale, a $100b plus fraud that has been perpetrated on the U.S. public as the companies manipulated books to create long-term capital gains, but the benefit should have been realized at the time. Worry much more about that than class action suits!

Still, once the dust settles you have a company like Broadcom that is growing 15-20% a year with $3.6b in revenues and $700m in profits trading at around 18 times earnings...

I am using The Wall Street Journal's Perfect Payday to track these guys, and will hopefully find a time to make a “best of list”. BRCM is a very extreme case (I hope), while many companies caught in the SEC’s net will be thrown back with little real damage.

BRCM 1-year Daily Chart

Comments

[Cameron Wright:]

Phil, while I agree with your conclusion that BRCM is likely a good buy at these levels, I don't agree with this statement:

<i>They didn’t steal money, they stole shares of stock. In fact, the shareholders aren't even any more diluted than they would have been if the options had been priced higher.</i>

They did steal money. By pricing options at $10 instead of $20, they stole $10 for every option exercised. I did a quick calculation, and if you assume all options are undervalued by the same $ amount, which is obviously not a correct assumption but about all you can assume based on the information they've given, then $1.5B in extra expense would mean each option granted from 1998 through 2002 was undervalued by about $8.80. This leads to under pricing from anywhere from just under $10 in 1998 to over $25 in 2000. If every one of these options had been exercised, this would lead to over $2.5B in cash that BRCM should have received that it didn't, which is equal to about $5 per share with 500m shares outstanding. Even if you assume that none of the 2000 options are exercised since they were repriced in 2002, it still comes out of just under $4 per share.

Once they give final details, I'll be able to get a more accurate estimate.

2006 Sep 14 12:48 PM