I’ve written many times about the future of XO Holdings (news, filings) and how the presence of majority owner Carl Icahn has warped the company to the detriment of both employees and shareholders, but it’s always from an abstract strategic point of view. But recent emails uncovered in the discovery process in one of several lawsuits by minority shareholders and included in the revised complaint have painted his meddling in the company in sharp relief. Here’s former CEO Carl Grivner’s email response to a fellow board member’s proposal to incentivize XO management with stock options in August 2008 (emphasis added):
First the stock option plan is not going to work. If you read the Preferred Agreement and understand the tax issues, there is a significant reason for keeping the stock below $2 for as long as possible. So while in most companies all the value that’s being created could be reflected in the stock price such is not the case here. Another reason is the stock is not widely held, is offered on the pink sheets, and neither of those is likely to change. So we either cash out the current plan in recognition of the last 5 years, convert it so there’s minimal upside or leave as is (which I described as worthless). Your advisors need to look at the complexity of the overall situation and not simple option based modeling that most public companies use.
The tax issues here refer to the net operating losses, and the value being created by keeping the stock price low is Icahn’s ability to maintain his 80% ownership so he can use those tax assets to offset profits elsewhere. And if Grivner didn’t explicitly say this was for Icahn’s benefit, an hour later the company’s then CFO Freiberg followed up with this supporting gem:
Carl [Grivner] asked me to sent [sic] this model to you.
I put this model together to show the impact of the XO stock price going up against the % Value Voting that Icahn affiliates have in XO. The key point here is for Icahn to maintain at least 80% in order to keep the ability to consolidate NOLs.
If [sic] cell B20 you can plug in a stock price for XO, and in cell B42 you can see the Icahn Value Voting %.
Below $1.55 per share, Icahn is at 80% or more. If the XO stock price goes above that, then potentially you lose the ability to consolidate the NOLs.
So let’s see. The company’s CEO and CFO don’t want to use stock options to incentivize management and align their interests with shareholders because they don’t actually want the stock to go up. Rather, they seek to ensure management has no incentive to see the stock rise, and thereby create value for Icahn via the NOLs at the expense of other common shareholders. I can’t believe they actually wrote this stuff down. Is there some other way to read this?
Meanwhile, Icahn is trying to buy Clorox, where he offered up the exact opposite sentiment to his current position on buying XO:
While we stand ready and able to buy Clorox, we encourage you to hold an open and friendly ‘go-shop’ sale process. We are confident the process will result in numerous superior bids for this company.
Can’t make this stuff up. I wonder who has the movie rights.
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