PALO ALTO, Calif. (CNN/Money) -
It's not every day that a company sends a clear message to investors asking them not to buy their stock. And yet that's nearly exactly what storage switch maker Brocade Communications did late Monday afternoon.
Now of course, Brocade didn't come right out and discourage investors from snapping up shares of the long-ago hot technology company. And, for that matter, investors don't need any help being discouraged.
Since Oct. 28, when Brocade pre-announced a worse-than-expected fiscal fourth quarter, its shares have plunged on one piece of bad news after another. The shares (BRCD: Research, Estimates) closed Oct. 25 at $8.25 and by Monday were worth just $4.64. A 44 percent drop in six weeks. That's pretty impressive for post-bubble trading.
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And by the way, if you're wondering why we still care about Brocade, a go-go stock if there ever was one (three splits in three years as a public company, one-time high well north of $100), the answer is that someone does. On Monday, when there was no news from Brocade, 18 million shares changed hands, making it the eleventh most active Nasdaq traded stock.
It's what the Silicon Valley company did after the market closed, however, that urges investors to stay away. Once upon a time, when a company's stock fell precipitously, its management would re-price the options of its employees.
In other words, they'd wave a magic wand and say, for example, "All of those options you had at $12 now carry a $3 strike price. Congratulations." That always was a blatant shareholder rip-off, and eventually accounting rulemakers made re-pricings unpalatable.
So financial sharpies came up with a new technique, known as the six-month-and-a-day rule. Accounting standards allow companies to institute programs that let employees exchange their options for new ones, provided the exchange is priced more than six months into the future. And that's just what Brocade offered its employees Monday for all their options at $12 per share or greater.
Put yourself in the shoes of a Brocade employee who's got a boatload of options at $20. He can turn all of them in for options at a new price, to be determined around July 10, 2003. Do you think he wants Brocade's shares to go up or down between now and then? (Hint: Lower strike prices are better than higher ones.)
Companies often like to prattle on about how shareholders are best served when their interests are aligned with employees. Well, then you might as well be betting that Brocade shares are worth less next July -- that's what employees are hoping for.
Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at lashinskysbottomline@yahoo.com.
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