More details on the Rackable proxy fight
Back in February, we blogged that Richard Leza Jr. of Sierra Madre, who owns 2,600 shares of Rackable Systems, had asked the company to nominate himself and Steve Montoya of Los Gatos to its board of directors, according to an SEC filing. He also submitted a proposal to have shareholders approve executive pay.
On Tuesday, shareholders received more details of the nominations, along with Leza’s argument on behalf of his pay proposal in a proxy filed by Leza:
“In our view, with stock-based compensation of $23.2 million in 2007 (versus R&D of $26.3 million and an operating net loss of $71.6 million), $20.8 million in 2006 (versus R&D of $16.5 million and an operating income of $11.5 million), and a projected 2008 stock-based compensation expense of $19.9 million, we believe compensation at Rackable Systems is not structured in ways that best serve stockholders’ interests.”
Really? In Silicon Valley? Never! Leza continues by looking at the compensation granted to Mark Barrenechea after he became CEO in May 2007:
“After only eight months as CEO, the Board approved total compensation of $3,309,000 in restricted stock and $9,621,000 in options, in addition to a base salary of $350,000 and quarterly cash bonuses totaling over $114,000. YET OVER THE SAME EIGHT MONTH PERIOD BETWEEN THE TWO RESTRICTED STOCK AWARDS, THE STOCK PRICE FELL OVER (-33%), LOSING OVER $130 MILLION IN MARKET CAP FOR STOCKHOLDERS.”
It’ll be interesting to see whether this proxy vote tells us whether shareholders are feeling rebellious this year.
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The $9M in stock options are underwater, so who knows if they will ever be worth anything.
The R&D expense of $26.3 million includes $4.9 million of stock comp expense so I don’t think his statement is really apples to apples with regards to stock comp of $23 M company wide vs R&D of $26M.
And that loss of $72M includes a goodwill charge of $24 million anyway, which doesn’t really matter from a cash or shareholder dilution perspective.
What really is out of whack though, which I am sure is aggravating Mr. Leza, is G&A expense is $36 M vs $26 M in R&D. That G&A is all overhead, finance, HR, CEO, etc. No tech company should have G&A expense higher than R&D expense. And clearly the majority of that expense is CEO related. Mr. Leza has a right to be upset.