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APRIL 30, 2003
By Alex Salkever eBay's Scary Stock-Option Specter [Page 2 of 2]
From 1998 to 2002, Meyer calculates, eBay tallied a stock-based compensation cost of $558 million, including the change in the 2002 10K that added $127 million in options costs. During that same period, eBay's declared net income was $389 million. So, if eBay had to expense all those options for that prior period based on its current valuing method, its bottom line would go from a $389 million gain for the five-year period to a $169 million loss. About 30% of that reversal comes directly from the addition of $127 million in options expenses in the 2002 statement. Of course, it's not known yet what methods FASB would require companies to use in valuing options, so that analysis could change. Surely, what investors care most about is what eBay -- and all the other companies that would have to start expensing options -- earns going forward. But for shareholder activists, eBay appears to serve as a prime example of the need for change. Many institutional investors are already well aware of eBay's options overhang, says author Ketz. But he's not sure how many have picked up on the $127 million clerical error that Meyer has flagged. eBay says it did receive some inquiries, but no complaints, from institutional investors. JUST ONE OF MANY. Ketz believes eBay simply hasn't paid much attention to the consequences of having to expense stock options because that budget line falls in the pro forma portion of its earnings report. "It's not like they're lying to us, and it's not like they're hiding key figures. They're at least presenting something," says Ketz. In that regard, eBay may be emblematic of the surviving online companies that made it through the bursting of the bubble with most investors just happy about future growth prospects. And if FASB makes this rule change, eBay will be just one of many companies that has to expense options going forward, and Wall Street might yawn. After all, even calculating the expensing of options on prior years' results will have no impact on revenues during that period. It's now history. In the present, however, Ketz and Meyer agree that eBay's stock appears to be overpriced, and that earnings quality is not as strong as investors might like. Meyer notes that of 87 cents per share eBay earned in 2002, 10 cents per share was interest income earned on cash reserves, not profits earned on revenues. Both Ketz and Meyer feel that, regardless of what FASB does, eBay shareholders might want to pay closer attention to the way this last great Internet-boom company expenses its stock options in next January's annual report. Either the accounting board or a drop in eBay's stock price could thrust the issue to the forefront sooner than that.
 Salkever is Technology editor for BusinessWeek Online Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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