"I think these companies are scared. So many companies used stock options so they didn't have to pay people as much in salary," suggests one San Diego financial planner. "Now the whole thing has been reversed, and they don't want to face the fallout from that situation."
Whether the dispute among the parties had grown heated before InfoSpace went public, in December 1998, is unclear. But one thing is certain: once the company had a market value, the options were worth something -- arguably a bonanza for those who had received and held on to them. At the same time, the company publicly acknowledged that the question of options was likely a sticky one. Among the most interesting disclosures in the company's amended SEC filing was a minor note that made the following admission: "The company's procedures with respect to the manner of granting options to new employees were not clearly documented." The company further recognized in its filing that the lack of clear documentation made InfoSpace vulnerable to potential claims. Jain, therefore, "agreed to place into escrow 1,000,000 shares of common stock beneficially owned by him to indemnify the company. ..."
Ten months later, when InfoSpace sold additional shares to the public, Jain increased that sum to 2 million.
Those precautions proved necessary, as lawsuits were indeed in the works.
In February 1999 Mark Kaleem settled his case for a reported $4.5 million. Later that year, according to the Richards complaint, InfoSpace allowed Tim Kay to buy 16,536 shares of its stock for 10¢ each. In March 2000, Kent Plunkett settled for a reported $10.5 million. Last January, Robert Hoffer reportedly settled for an undisclosed sum. The Lucky and Richards suits are still pending. Lawyers for the plaintiffs declined to comment on specific details of the settlements, citing confidentiality provisions in the settlement agreements.
Kathleen Covey is a San Diego financial planner who offers financial education courses on stock options. She says that companies like InfoSpace are now in a ticklish situation. They need to better educate employees about options, but doing so in the wake of a market collapse might raise thorny questions about why they haven't done so previously.
"There are a lot of issues employees don't understand," Covey asserts. Why? "Because they haven't been educated." Whose responsibility is that? "I think the companies'," she continues. "They should take an active role in educating employees about these benefits if they are going to offer them."
In fact, Covey says, that education process should be going on now with the market washed out. "There's a huge need for it," she notes. But it isn't happening. "I think these companies are scared. So many companies used stock options so they didn't have to pay people as much in salary. Now the whole thing has been reversed, and they don't want to face the fallout from that situation."
Fallout
During the past 18 months InfoSpace stock fell from a high of $138.50 a share to a low of $1.56. (It was at $4.60 at press time.) But that descent hardly seems to have slowed Naveen Jain in his company-building enthusiasm. After hiring Arun Sarin from Vodafone, in April 2000, Jain engineered the merger of InfoSpace with Go2Net, one of the Internet's leading networks, paying for the acquisition in stock. Analysts had mixed feelings about the deal, though many favored it.
Allyson Rodgers, the Wells Fargo Van Kasper analyst, calls Go2Net "a good fit" with Jain's company. Go2Net gave InfoSpace entrÉe to the broadband market. In addition, she says, Go2Net founder Russell Horowitz, who himself had made a few smart acquisitions, was seen as a savvy and seasoned manager.
"It's clearly an unsettling thing when senior management leaves like that," says one analyst.
But the enthusiasm proved short-lived. Horowitz stepped down within four months -- and, in fact, unloaded much of his company stock. Moreover, on the same day last January that Horowitz's departure was announced, it was also announced that Sarin, who had lasted eight months, and InfoSpace's new chief financial officer, Rand Rosenberg, would be stepping down or leaving the company altogether. That amounted "to a big red flag," says WR Hambrecht analyst Peter Friedland. "It's clearly an unsettling thing when senior management leaves like that." Several analysts downgraded the stock the next day, and it lost half its value two weeks later.
Moreover, both Friedland and Rodgers are puzzled over how InfoSpace dealt with the Go2Net acquisition. "InfoSpace bought the company -- and then they decided it was no longer a viable business," says Friedland. "They dramatically scaled it down." He now labels InfoSpace "a wait-and-see story."
In early February of this year InfoSpace forecast that its revenues for 2001 would total about $200 million, a third less than the $300 million Wall Street was expecting. (Moreover, InfoSpace had previously told analysts it expected $360 million in sales.) It then said it would cut 250 employees from its staff of 1,200.
Back in March 2000, when Internet stocks had started to weaken, Leslie Walker of Washingtonpost.com interviewed Jain. She asked him why InfoSpace's stock had declined sharply in the weeks prior to the interview. Jain waved off the suggestion that there was something fundamentally wrong with the company, replying that InfoSpace's market value would one day exceed that of Microsoft, Intel, and Cisco combined. "If you are an investor, would you want to miss out on such a great opportunity?" he asked. "How would you answer ... your grandchildren?"
Interestingly enough, in the next three months Jain would sell $80 million worth of his stock at prices far above today's depressed level. That, perhaps, is what Naveen Jain will tell his grandchildren.
Edward O. Welles is a senior feature writer at Inc.
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