Google shareholders lose that loving feeling

By Alexei Oreskovic - Analysis

SAN FRANCISCO (Reuters) - Google Inc (GOOG.O) is famous for pampering its employees, but some shareholders feel like they're getting a raw deal.

The sore spot became evident after the Web search leader decided last month to reset the price of underwater employee stock options, in light of a more than 50 percent drop in Google's share price from its November 2007 peak of $747.24.

The move, which will result in a $400 million charge, provoked grumbling among some investors who are not being similarly compensated.

While investors have griped about Google's unconventional actions in the past, such as its refusal to provide earnings forecasts, its appreciating stock price had muted most of the discord. But with shares well off highs, some analysts say Wall Street may be less willing to give Google a pass this time.

"I don't have as good a feeling as I did before about the company," said Jerry Dodson, chief executive of Parnassus Investments, which bought Google shares when they were priced in the low $400s. The stock was trading at $343 on Thursday.

For now, Dodson said he is prepared to live with Google's offer to reset the price of employee options with a strike price below Google's closing price on March 6. "But it puts all of us that have invested in the company en garde," he added.

Patrick McGurn, special counsel of RiskMetrics Group, which advises institutional investors on governance and proxy issues, said Google has some fence-mending to do, as there may be an outpouring of discontent at the company's annual shareholder meeting, which is usually held in May.

McGurn said the option repricing plan is clearly not shareholder friendly, but it is too soon to say whether his firm might recommend shareholders to take any action.

TRACK RECORD

Stock options provide incentives for employees to work hard and share in profits. But the option becomes worthless when the market price falls below the exercise price. Google has said about 85 percent of employees have underwater options.

"Because motivating and retaining employees is a good thing both for those employees and our shareholders, we believe this exchange works for all involved," said Google spokeswoman Jane Penner.

Many investors feel Google's plan, which lets employees exchange underwater options at a one-to-one value, is overly generous and not necessary given the difficult job market.

But analysts say the issue would quickly be forgotten if Google resumed its track record of impressive growth and innovative products once the economy began to recover.

"As long as the company continues to execute, I think shareholders will give them a lot of leeway," said UBS analyst Ben Schachter.

Indeed, Google shares have risen about 12 percent since it delivered better-than-expected quarterly results in January, when it detailed the option exchange plan. That compares with a flat Nasdaq composite index .IXIC over the same period.  Continued...