As most of you know by now, Sirius XM (SIRI) CEO Mel Karmazin announced Thursday that he will continue selling his stock, from options that were awarded to him as a bonus several years ago. One big word that stands out in this announcement is "liquidity." He wants to have millions in cash added to his portfolio:
NEW YORK, Aug. 30, 2012 /PRNewswire/ -- Sirius XM Radio today announced that its Chief Executive Officer, Mel Karmazin, has adopted a trading plan for SiriusXM common stock in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. This process is intended to facilitate Mr. Karmazin's personal financial planning strategy of asset diversification and liquidity.
In accordance with the 10b5-1 plan, up to 30 million options to purchase SiriusXM shares will be exercised and the underlying shares will be sold into the marketplace (a portion of the proceeds will cover the exercise price). It is expected that the plan will become effective in, and sales thereunder may be made as early as, mid September 2012.
That was enough to bring on a lot of articles announcing that the CEO will probably be leaving when his contract is up at the end of this year. This is pure speculation, especially since Liberty Media (LMCA) Chairman John Malone has stated publicly that they want Karmazin to stay in the event of a successful Liberty takeover of Sirius. And Mr. Karmazin remarked that he had every intention of staying with the company as long as he and the board can negotiate a deal.
However, there are some things to consider before leaping to conclusions. First, notice that the press release says "....up to 30 million....", and it also states "......sales thereunder may be made as early as, mid September." These little loopholes may be nothing. But because the word "thereunder" is used in legal documents, it is possible that those loopholes were meant to be there. I suddenly feel the Sirius Bears leaping all over this as ridiculous, and maybe it is, but it must be considered.
Because it actually does not say that 30 million shares will be sold in mid September. There may be 5 million shares sold in December. Just out of curiosity, I went back to check the wording of the company press release early this year when Mr. Karmazin announced he would sell 60 million shares for charity:
NEW YORK, Feb. 17, 2012 /PRNewswire/ -- Sirius XM Radio today announced that its Chief Executive Officer, Mel Karmazin, has adopted a trading plan for SiriusXM securities in accordance with Rule 10b5-1 of the Securities and Exchange Act of 1934. The transactions that will take place under the plan are part of Mr. Karmazin's strategy for financial planning in connection with his philanthropic efforts.
Under the 10b5-1 plan, beginning in April 2012, Mr. Karmazin is expected to exercise 60 million options to purchase SiriusXM shares. Shares underlying the options will be sold to cover the price to exercise the options and the remaining shares will be sold with the proceeds delivered to Mr. Karmazin.
This is very specific, stating outright that Mr. Karmazin is expected to sell 60 million shares beginning in April. Back in February of this year, after he announced that he would be selling those 60 million shares, many articles came out, including this:
Following this planned sale of shares, Mr. Karmazin will still own over 68 million shares and options of Sirius XM. True, that's not chump change, but most of us could get by on the $135 million he will net from the sale of the first half of his shares. And having watched the self aggrandizement over the last few years, we can fully expect the award of more options in the future.
What caught my eye was the last sentence. Especially the statement, "we can fully expect the award of more options in the future." Can we? Where is this statement coming from? The article is from Forbes, which also ran another infamous article where Mr. Karmazin complained of being underpaid:
Huh? Karmazin has earned more than $37 million since he took the job in November 2004 and stands to clear another $125 million or so next month with a planned exercise of stock options.
So is he underpaid? If Mr. Karmazin made $37 million up to 2012, that would be just over $5 million a year, without the options bonus. Checking around, the average salary for media executives is $17 million. And in a survey of CEO pay for the 500 largest companies in the U.S., the average pay is $10.5 million:
The value realized from exercised stock options and vested stock awards are the main components of total pay, accounting for 61%.
The top earner in our report is McKesson's John H. Hammergren, with $131 million in total pay. Hammergren drew $6.3 million in salary and bonus, but also realized $112 million from the exercise of vested stock options. The next four top-paid chief executives, also earning most of their pay from exercised stock options or vested stock awards: Forbes Billionaire Ralph Lauren of Ralph Lauren ($67 million); Michael D. Fascitelli of Vornado Realty ($64 million); Richard Kinder of Kinder Morgan ($61 million) and David M. Cote of Honeywell International ($56 million).
So some may argue that if Karmazin thinks the price of the stock is going up, he would hold on to these options. However they were awarded to him in June of 2009 when the price of the stock was only 43 cents. And now these shares have not doubled or tripled, they have gone up six times, or 500%. And this is his salary, his big payday to make up for being one of the lowest paid media executives in the country for the last eight years. And he will still have 38 million shares left that should be worth hundreds of millions in the future.
The same thing is true for Apple (AAPL) executives whose restricted stock units from 2008 vested earlier this year. But most writers do not consider Tim Cook's (and other high ranking Apple management) actions of selling these Apple shares, a signal that he is about to leave his job. That is because this is a bonus designed to keep top management, and investors understand that:
- Tim Cook sold 106,640 shares at an average price of $600.79/share, after having 93,360 shares withheld for tax purposes. He netted $64 million.
- Peter Oppenheimer sold 80,147 shares at an average price of just under $599/share, after having 69,853 shares withheld for tax purposes. He netted just under $48 million.
- Phil Schiller sold 64,151 shares at an average price of $602.66/share, after having 55,849 shares withheld for tax purposes. He netted $38.66 million.
A restricted stock unit, or RSU, is a form of compensation valued in terms of company stock, but the stock is not issued at the time of the grant. Instead, it's meant as an enticement for senior management to stay with the company. The shares in question were originally awarded in September of 2008, likely as part of an annual bonus. When they vested on March 24 of this year, each RSU was converted to a single share of AAPL stock. The executives used a Rule 10b5-1 trading plan to manage the sales of the shares.
And now negotiations are probably going on to decide if this Sirius XM Media Mogul will stay or go. Part of those "talks with the Sirius Board" will probably include more stock options for Mr. Karmazin, if he does decide to stay with the company. He promised that he would let us know his plans before the next conference call, so until then, we will just have to wait.
As a lot of writers have noted, this could affect the stock with a short term dip. But seasoned investors know not to take this news as a true sign of the future. If the price dips when investors think Mr. Karmazin could be leaving, then it will drop dramatically in a couple of months if he announces that he really will retire. However, the reverse of that coin is that it will jump if he stays. Which really shows how much faith investors have in this guy. So buy on the dips. And when news comes out, be sure to investigate it before buying or selling your shares. Hang on tight.
Disclosure: I am long SIRI.
Additional disclosure: I may buy Sirius XM stock in the next 72 hours.