Executive Options Abuses Say Short Sell Yahoo

I will examine some of the options abuses that are apparent at Yahoo (YHOO) but that no one writes about.

We will we start with the CEO Terry Semel.

SEC Form 4s records that he was granted options to purchase Yahoo shares of stock as below:

Summary of Grants

1. 10 million options (exercise price 17.62 to 75) with a Fair Value of $110 million allegedly granted on 4/16/01 two weeks before he became CEO when the stock was 22.30.

2. 1 million ex. price. 9.24, on 10/02/01

3. 2 million ex. price. 12.92 on 7/11/02

4. .8 million ex. price. 16.46 on 12/11/02

5. 2.9 million ex. price. 41.70 on 3/10/04

6. 1.4 million ex.price. 37.08* on 12/16/04

7. 2 million ex. price. 34.75* on 2/01/05

8. 1.3 million ex. price 40.68 on 3/10/06

9. 6. million ex price. 31.59 on 5/31/06

10. .8 million ex price 32.12 on 2/26/07

Exercises and sales:

Semel exercised and sold 9,770,000 shares from the above grants and pocketed $450,000,000 net before taxes. He still holds ESOs worth $270,000,000 and has been granted Restricted Stock valued at $8,800,000.

There is a very interesting grant of 2,900,000 shares at $41.70 on March 10, 2004 followed by an announcement on April 7, 2004 of great earnings and a stock split.

The $41.70 price was 5 cents above the low closing price for the year and the grant was immediately prior to the largest 30 day rise in the stock for the last 6 years.

He sold 2,000,000 of the stock underlying the options on April 12, 2004 and the other 900,000 in July at 60.

Can anyone say whether that grant and sales of stock violated Section 16b of the Securities and Exchange Act of 1934 making the $50,000,000 gain recoverable by the company? I am certain it did.

In the last 6 years since he became an employee of Yahoo, he cost the company $720,000,000. The stock advanced since he became CEO from 11.15 to around 28.35 post split prices (about 158%) today. Not that great a performance compared to 400% gains for Google and 900% gain for Apple over a similar period.

The $450,000,000 liquidated gain was never expensed against earnings and about $200,000,000 of the un-exercised options he still holds will never be expensed.

Short It

Semel, although by far the largest recipient of the graces of the Compensation Committee, is not the only hog feeding at the trough of the Yahoo employees and investors. There are a series of other pigs and piglets.

The feeding frenzy has died down, but if the stock were to start advancing, the Compensation Committee will jump with more chow.

Semel and others will exercise loads and sell and ask for more options because they are no longer sufficiently aligned with the interests of the share holders.

But this time, all of the options will be expensed with the appropriate accounting impact. His expenses and those of similarly situated others will cap any up movement.

So sell your Yahoo because it can't go up, unless you believe that a tiger can change its stripes.

Disclosure: Author has a short position in YHOO

YHOO 1-yr chart

Comments

[CrossProfit_:]

This could turn out to be very risky as MSFT is coming out of the closet regarding its admiration for YHOO.

YHOO is not interested in a merger with MSFT; amongst other things there is a personality/culture clash. As long as the possibility of a merger exists, YHOO can not fall far. Should YHOO publicly give a nyet (no) to the marriage; then your position could be OK, assuming you shorted at 32 and not 28. Should the merger go through, you're screwed.

Notice how this was released in the press. Normally merger talks are confidential. The mere fact that MSFT leaked this news shows that we are dealing with a hostile takeover. YHOO resolve will be put to the test.

Disclosure: Opinion of a CrossProfit analyst and may not be the opinion of CrossProfit.com.
www.crossprofit.com

2007 May 04 08:52 AM

[John O:]

Cross Profit:

Yes, I should have waited ; but no reader could have acted before todays move. My fundamental view is the same.

Looks like Semel will have a big day. Touche.

Cheers:

John Olagues

2007 May 04 09:40 AM

[David Lentz:]

In the end, I suspect that Semel will take the money and run, pushing Yahoo into the arms of Microsoft and funding a firm of defense attorneys for years to come. And Yahoo will vanish beneath the waves inside Microsoft, alongside others who have been swallowed up and digested into mediocrity. Remember HotMail? Bungie? Proud futures snuffed out. Yahoo will be the same.

My condolences on your short position. Reality has a cruel way of punishing us even when we are right to nine decimal places.

2007 May 04 01:41 PM

[David Lentz:]

Upon reading the WSJ's post-market-closing piece on this "merger/takeover", it appears that my condolences might be premature.

As CrossProfit notes, the way this story appeared in the press as leaks instead of press releases, casts a certain smell. There's the distinct possibility that this was an engineered situation intended to do one or both of a) rattle Google, or b) run a pump & dump operation on either the stock or options.

As the smoke clears next week, we'll see where it goes from here. We could very easily see the stock drop back to the mid-20's, and if the "sell in May and go away" proves its worth this year, we could see YHOO slide quite a bit. Throw in a dash of realism, or $4/gal gasoline (a summer hurricane sideswiping a refinery would do the trick), or an SEC investigation, or any of a number of other things, and those shorts could look pretty good by the Fourth of July.

2007 May 04 10:03 PM

[k_denninger:]

Just buy some PUTs and forget about it.

If you're wrong, you lose a bit, but you don't get crushed by this sort of blatent BS that happened this last week.

2007 May 05 08:37 PM