Thursday, July 10, 2003

Little Microsoft is all grown up now


Employee stock plan signals maturity

By Helen Jung
The Associated Press

SEATTLE - Even Microsoft Corp. must obey the physics of age.

Long considered a blue chip among tech companies, the Redmond-based software giant once set the standard for explosive growth with Gulliver-like leaps in stock price that transformed thousands of employees into stock-option millionaires.

But in the past few years, the company has grappled with the maturing of its business.

Following its move earlier this year to start paying a dividend, the desktop operating system standard-bearer is now abandoning the high-risk, high-reward practice of issuing stock options.

In deciding to instead grant shares outright, Microsoft is signaling to the rest of corporate America that it is growing up - and growing slower.

"This is no longer a hyper-growth company," said Brad Reback, executive director of CIBC World Markets. "This is a large-cap growth stock. I think the gains in the stock from here on will be much more measured."

Microsoft's announcement Tuesday that it would abandon its long-held practice of issuing stock options - the rights to buy stock at a set price, which is a great incentive when share prices are climbing - diminishes the potential gains for workers.

Although employees will automatically receive free shares, they will receive fewer than they would have been eligible to buy under the former program. The lower rewards are also lower-risk.

"It is a good deal for employees," Reback said. "You now have a guarantee as opposed to a lottery ticket."

But it's also the realization for employees like Francois Ajenstat, who joined Microsoft three years ago, that the quick rise to Microsoft millionaire is gone. Still, he said he and other employees are largely supportive of the change.

"I really believe in the potential of the company, and I sincerely hope that our stock could grow like it did in the past," said Ajenstat, a product manager for Microsoft's Office business software group.

But "if you really look at the realities, the way the market is, we are a pretty big company now, and growing at the rate that we did before is probably not something that we can expect to see."

The change is an admission of age from Microsoft, which in its 28 year-history has earned the envy of many - reporting 50 percent quarterly profit increases, billions of dollars in cash reserves and a stock that has soared, making a single share purchased for $21 in its 1986 stock-market debut now worth nearly $8,000.

But the company has been slowing of late.

Although it still pulls in billions of dollars in profits each year and has a cash hoard of $46 billion, Microsoft is not going to repeat the acrobatic performances of its younger years, analysts said.

The company still has strong prospects, and boasts commanding market share and profit margins for its Windows operating system and Office business software.

But with such a grip on those markets, the company is running out of customers to court. Its other investments, including its Xbox video-game business and MSN Internet service, continue to lose hundreds of millions of dollars a year.

For Microsoft employees, the change in the past three years is dramatic.

In 1999, those working in Washington state collectively earned about $8 billion in income from exercising options priced at lower levels than the stock's trading price at that time, said Seattle economist Dick Conway, a principal in Dick Conway and Associates.

In 2002, that figure was about $3 billion, he said.

Microsoft says the shift to stock grants aims to attract and retain top employees. In recent years, the company's stock options were "underwater." (In order to be of value, the option price must be lower than the stock price at the time the options are exercised.)

John Connors, Microsoft's chief financial officer, said the change is not necessarily due to the flagging stock price.

"It's really more a function of having a more predictable and stable compensation plan for employees," he said.

Marty Shagrin of Victory Capital Management believes other companies will inevitably have to expense stock options and stock-based compensation, and Microsoft may have found the best way to handle that.

For employees, "it seems like a chance to get rich quick is less, but at least the chance of coming away without anything is also less," he said.



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