Friday, September 11, 2009

Guardian: Yahoo: Share sales, tax bills, discontent - what's going on?

Posted by Bobbie Johnson, San Francisco
Friday 11 September 2009 18.21 BST

Carol Bartz

Photograph: HO/AFP/Getty Images

Earlier this week we reported how new Yahoo boss Carol Bartz had sold more than $2m in shares since taking over in January, part of a number of sizeable sales by senior executives at the company that seemed a little incongruous, given the web giant's troubled financial results of late.

When I had contacted Yahoo about the share sales, a spokeswoman told me that Bartz sold her stock to cover tax liabilities, but would not comment at the time on the sales conducted by other directors (admittedly, this was late on Friday night before a long weekend).

Without a great deal of information from Yahoo, we were left with a number of questions: what had forced Bartz to sell so much stock just months after taking control of the company? Why had others followed suit? Why had investor-turned-director Carl Icahn traded huge portions of the company?

(OK, we know the answer to that last one: he's a shark)

Eric Jackson, the former dissident Yahoo investor who put the numbers together, followed up himself with an opinion piece on in which he called out their actions as "pigs-at-the-trough behavior".

It certainly looked that way to the naked eye. But what was really going on?

Here's a little more light shed on the issue thanks to Ben Silverman of InsiderScore, who got in touch to tell me that he thought we were making hay out of what he believed was a non-issue. He said by email that Bartz sold her shares to cover a tax bill due from the options she was granted.

Bartz's dispositions in March and June were related to the vesting of a restricted stock award she received in January. That restricted stock award was part of the "Make-Up Grant" clause of her employment contract which directed that she receive $10 million, including $7.5 million in restricted stock, in compensation for foregoing future compensation due her by AutoDesk.

When tranches of the restricted stock vested in March and June, Bartz was liable for the taxes associated with the shares. The IRS treats those shares as having a cost basis of $0 and the value of those shares as ordinary income. As such, Bartz would be liable for taxes associated with the number of shares vested times the market price of the stock (for the March tranche, she owed the government taxes on a little more than $2 million in income as a result of the shares vesting). Bartz will, in all likelihood, conduct similar transactions on September 30 and December 26 when the other tranches of her restricted stock award vest.

Essentially: the rather generous terms of Bartz's compensation package mean that she was probably exposed to a large tax bill soon after joining the company. She sold shares in the company to cover that bill. Silverman added that some (though not all) of the share sales by other directors were for similar reasons.

There aren't clear indicators about what Bartz owes the taxman, but if Silverman's right that sounds fair enough - though given that Bartz has significant personal wealth thanks to 17 years building up software firm AutoDesk, it is interesting to wonder why she chose to pay her tax bill using Yahoo shares (which optimistic executives would believe could increase in value, of course) and not cash in the bank.

However, this still strikes me as a remarkable piece of management by Yahoo at board level and in terms of public relations. What better than to quash the morale of employees than lure in a new CEO with a very substantial compensation package which then effectively forces her to sell vast amounts of equity in the company?

It's the sort of thing that has left Yahoos I know grumbling about her long-term commitment - and it certainly must seem a bit rich to receive one of her famed weekly memos telling staff to buck up knowing that she's earned millions for essentially signing away a significant slice of the company's business to Microsoft.

In any case, perhaps it's better to let her speak for herself. Here she is being interviewed on US financial channel CNBC, in which she justifies the Microsoft situation and says she's going to be around for a long time.

This wasn't enough to satisfy Jackson, who has followed up again questioning the evidence to back up her statement. He also points out that she is on course to clear up to $6m in share sales by the end of her first year in charge - something he suggests is Yahoo using its shareholders to sweeten the deal to get Bartz on board, and that she has been given a "boatload of cash way too soon".

Yahoo may be an example here of a much wider malaise, because the real question is how you tie executive compensation in to actual performance. Where do you draw the line when you're trying to hook in a top executive for your public company? How much say should shareholders have over the sweetheart deals offered to new executives? And, is it justifiable for senior executives to cash out while the company they run goes through one of its worst ever periods?

Those are we all need to consider - even if the answers are very hard to divine.

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