Steve Jobs Gets Fired?

Wednesday, April 25, 2007 | Wayne Mulligan

Well, well, what an interesting day it was yesterday – just as the former Apple CFO, Fred Anderson, cuts a deal with the SEC, he goes and drops a bombshell of a statement:

Steve Jobs – the man himself – was solely responsible for the options backdating scandal that has haunted Apple all year.

This is one of the first times since this whole “options backdating” situation hit Wall Street that an active CEO was directly implicated in the impropriety.

What makes the whole thing even more scandalous is the fact that the company is Apple (Nasdaq: AAPL) – one of the brightest stars on the Wall Street stage. And the CEO is Steve Jobs, who has been the “man of the hour” for the last four years as he turned the beleaguered computer maker into a consumer electronics power house.

But all the media hype aside, it’s critical to examine the potential repercussions for Apple and its stock.

In reality, if the allegations are true, Mr. Jobs didn’t do anything terribly wrong. While this is a subjective conclusion, I think many would agree with it.

In order to understand what I mean, it would help to think about exactly what “options backdating” is.

Let’s say you own a company, and you’re trying to recruit top talent to come work for you. You know the obvious way to do this is to financially incentivize people. So, instead of parting with cash in order to do this, you give them stock in your company – actually, you’d probably give stock options.

This not only incentivizes people, but it also locks them in because they usually have to work for a certain amount of time before they can cash in on their options – so you’re accomplishing two goals at once.

This is a typical practice in the technology space, and it’s PERFECTLY legal.

But let’s take this one step further ...

Now, the employee you’re recruiting might say “OK, these options are great, but what if your company’s stock goes down dramatically between now and the time I can cash these in? They might be 'under water' (meaning the options are more expensive than the actual stock), and I’ll get nothing.”

As the head person in charge, you might say, “You know what, I’ll guarantee your profits by “backdating” your options.” In other words, you’ll issue the options to the new employee with an older date on them – typically when the stock was much cheaper than prevailing prices.

This pretty much locks in a profit for the new employee. Just as a side note, this is also used to incentivize current employees as well.

What it also does is that it allows the company to reduce its options-related expenses on its income statement. This is a little more difficult to explain, so I’ll give you the condensed version.

Under new accounting laws, companies have to expense stock option grants the same way they’d expense someone’s salary. So if the options that these companies are granting are “cheaper,” then they have reduced expenses and in turn, more profits.

The dollar amounts we’re talking about don’t indicate massive fraud and deception going on at Apple – 40 million dollars on $8 billion in revenue isn’t all that much – the company wasn’t pulling an Enron here or anything.

Now, I don’t want you to get me wrong – this practice is illegal and far from ethical. It’s not something I’d ever personally do or condone if it occurred at my company.

However, does that mean that Apple as a company is any less reliable? Does it mean Apple’s iPods are of lower quality? Does it mean that the iPhone won’t be the hottest product on the market this summer?

I think the answer is “NO” across the board.

However, that doesn’t mean Apple’s stock won’t be hurt by this news. Most folks will worry that it’s going to mean that the company’s high profile CEO will get his walking papers (again).

Apple without Steve Jobs is like peanut butter without the jelly – and that’s what could drag the stock down.

So we’re going to have to pay close attention to how Apple’s board takes the news. If talks of an ouster occur, I definitely wouldn’t be a big buyer of Apple’s stock until an appropriate successor is announced.

But if this stock tanks, and the board stands firmly behind Jobs, then I think this could be one of the biggest buying opportunities all year.

So, keep an eye on announcements coming out of the company over the next few days. You might have the opportunity to make some quick and easy money on Apple over the next few months.

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Wayne Mulligan
Chief Investment Officer
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