Zip
It still boils down to the incentive factor. Everyone knows that the share price will rise on the completion of certain closings of certain deals. The idea is to get the best royalty rate possible for the company. .5% means a lot of money over the years to the bottom line for the shareholders, but it means a whole lot less to the people negotiating the rates if they are already set with large numbers of options and more in the pipeline. It has placed the company in the same shape that Branson left it. The 5% comission of the front license money created a bunch of autonomous contracts with little or no relation to the other although they covered the same subject matter. Escape clauses were allowed to be included because the executives were making 5% of the front money rather than the being compensated for the whole deal. Suddenly, we found ourselves with no recurring revenue and a large list of licensees. The company did not have a clue about MFL clauses and had no reason to care under the compensation structure.
Suddenly, we get the Nok deal which on its face looks great. 31 mil up front for royalties, generally paid up language, license going forward and engineering revenue. We had hit pay dirt from all apparent tea leaves and of course we could not wait to accomodate the proposals of the board. We rushed to give management a large percent of the company because we perceived the deal as being the ticket to 1-3% future royalty. We gave them their 10 year plan and gave them more the next year.
The share price moved based on rumor mills and winks and nods. Ericy was coming and "just give me a trial date" language had us running around with school boy hard ons. This board did the DD and discovered that Nok would be paying at the end of 2001. Wow, 1-3% from the biggest in the world. Wow, we are hiring and the others are downsizing. Ericy has sold 100 billion dollars worth of TDMA/GSM infrastructure and phones on a world wide basis. Our 863 patent is alive in the EU. We cannot sleep with our school boy trophies and our wives and girl friends are trying to avoid us. We suddenly take on the Jett Rink attitude because we cannot help but be rich. We had MOMENTUM baby.
Suddenly matters change because Nok is not paying for our workers anymore. Hey, no biggie because they will be paying royalties soon, right. We settle NEC pretty cheap, but get a 3g license and front money. Samsung goes to arbitration for the stated reason of under reporting and the company tells us that discovery shows they owe more. Oh boy Gene, give us some more doublemint because we got MOMENTUM.
All of a sudden, we lose a few claims in Ericy, Samsung wins the arbitration, Sharp is not renewing, Nok is still not paying and what, a mandate made us settle early. Our once proud school boy trophies begin to resemble the starter buttons on the 39 Ford. The share price has been going up in anticipation of Ericy and a CC is scheduled. Hey, it is a sunny day in KoP. We did not get those percentages we told you about, but we got you a watershed event. Well, if you say so sir. Hey, wait a minute, why is our price dropping? No, why would they be selling at this time? They did say Nok and Samsung would owe millions didn't they? They sold how many shares? What about MOMENTUM?
1stQ earnings look pretty good and that CC was something. Hey, let's get a bunch of shirts with "M" on them. We got the MOMENTUM baby and we got it despite making deals for very low rates. All right, these guys are asking for more so you know the Nok deal must be coming before the ASM. What, he sold 50,000 shares. Who is this guy anyway? He cannot wait a few weeks for Nok? Hey what about MOMENTUM?
Thus, we have mangement making substantial sums of money by selling into sunny days, watershed events and MOMENTUM. These sales are OK with everyone except some question the timing. You do not strike out on a high outside pitch that would have been ball four during a rally. The act is known as a rally killer. It is contra MOMENTUM that has shifted your way.
Moral of the story is that the arguments for incentive do not work unless the parties making the deals cannot prosper on not reaching a stated goal. These guys missed their stated percentages by a wide margin that effects the share holder far greater than option holder. The share price is rising because of a lesser result in 2g which was around long before these guys came on board the options train. The incentive was not there to grind out that extra .5% because the share price would rise with just about any mention of some recurring royalties after all these years.
Please do not take this post as management bashing. To the contrary, we placed these guys in this position of different motivation. We would all do the same. We want the highest and best rate and they just want decent cash flow going into 3g. We loaded them up too soon. Will we make the same mistake again as we enter into 3g? Probably, and if we do that is life. I would like to let them know that more gold is available if 3g licensing captures the eates they have advertised over the years and the lower the rate, the less gold they can expect. I believe it offers incents and aligns the interests a great deal more.
MO
loop
