What Does Backdating Options Really Mean for Biomet?
BY LAUREN UZDIENSKI, APRIL 3, 2007
Preliminary findings from an investigation into Biomet's options backdating announced last week showed a $50 million discrepancy between 1996 and 2006, and CFO Gregory D. Hartman and Exective Vice President of Administration Daniel P. Hann have both resigned. What does this really mean for Biomet?
Despite the media attention, this may turn out to be more of a minor bump in the road for the soon-to-be-private company. The unusually long closing period announced when Biomet was acquired in December signalled an issue with backdating, which means changing the dates on employee stock option grants to reflect a day when the stock price was lower - thus advantaging the grantee. There are a few ways that backdating can happen: the date on the option can simply be changed, which becomes harder to pull off as EPS software (like Equity Edge®) becomes more robust under Sarbanes-Oxley; phantom options can be granted to anyone and then transferred to someone else; or there can be a subsequent allocation, where an option pool is established and options are granted throughout the year. In those cases, both the person giving the option and the person receiving it have to be aware of it. Backdating is not an illegal practice per se, but if disclosures to the public are shoddy or nonexistent, then a company can find its way into trouble.
Though we don't know the exact circumstances of Biomet's options misdating practice, we can ascertain the severity of it through publicly available data. Between 1996 and 2006, there had been a $50 million difference between the correct and the misdated options - for a company with a $10.5 billion market cap, $2.07 billion in revenues and $410 million in net income, the $50 million is relatively minor.
The Company has taken steps to move on from the backdating issue with the resignation of Hartman and Hann, who will both remain as consultants. Biomet will restate their 2006 Annual Report as well as fiscal first-quarter report. However, with Biomet going private in the next six months, we can expect that the backdating problem will have little long-term impact and that the Company will continue to forge ahead.
