How Finance Helped Silicon Valley Build a Better Mousetrap (Part II of III)

Note: Last fall, when I first interviewed Paul Vilandre, I had high hopes of writing a more plus-sized feature on the subject of finance innovation and the rise of Silicon Valley. For one reason or another that effort became sidelined, and until recently I sort of lost track of our interview. Now, while casting a fresh set of eyes upon our discussion, I realize that I would have been greatly challenged to produce a feature more chock-full of insights than those revealed by Mr. Vilandre's own words.

When Paul Vilandre exited a coveted finance job with Digital Equipment Corp. to join Silicon Valley-based Intel Corp. back in 1978, he was not alone. Over a period of decades, thousands of East Coast executives were lured west as part of a mass migration of talent that can be traced to a single finance innovation: broader application of stock options.

In this interview excerpt, Vilandre explains that the generous application of stock options was only part of a larger distinction between West Coast and East Coast companies -- one that may best be revealed by whether companies manage according to their P&L or balance sheet. Click here to view Part I of interview

BF: Silicon Valley finance began influencing East Coast companies as well as the world?

Vilandre: Yes … well, another interesting thing I observed regarding stock options occurred after I left Intel. A company that I had joined basically ended up being acquired, so I had to find another job and went with a subsidiary of Hyundai Electronics that was being set up in America with an American management team.

The president was Korean, and his name was Dr. C.S. Park. He was an exceptional executive and very active in the Valley and sits on many boards to this day.

One of the hardest things to explain to Korean managers in Korea was what stock options were. The idea of having a share of ownership in a company that was spread in substantial numbers to the employees — not just to the top chiefs, but to the Indians — was very hard to explain. It was almost like trying to teach Greek to them. Dr. Park was sort of in the middle at the time — again, this goes back quite some time — and he really wanted to study things more closely. We went to three different law firms and had each one of them present us with a proposed stock option agreement. The three had 80 percent in common but were sufficiently different in certain ways, and I think that this is another interesting point. People often think of stock option agreements as being uniform, and they're not. They actually vary from company to company.

BF: So you have worked with DEC's founder, Ken Olsen, as well as Oracle's Larry Ellison?

Vilandre: By choice in the '90s, I was a small-company guy. When I worked for Oracle as the VP of Finance for the Americas, it was still a pretty small company – only a couple of hundred million in revenue. I didn't work directly with Larry Ellison, but Ken and I had a special relationship and I think that he appreciated my way of explaining finance. Eventually, I think that he had a hard time passing on the company, but when I worked there he made a point of dropping by my office and asking questions before he had to speak to Wall Street. We would talk for half an hour to an hour about how I viewed the results and how I interpreted them.

When I left DEC to go to Intel, Ken came by my office. He closed the door and told me that I was going to a good company, if not a great one, at Intel, and he said that Intel was good not because it dared to be good, but because it dared to be better. Ken was an engineer's engineer. And then he said that he had recommended to the board — and that they had approved — the acceleration of my options. I had been there around 6 years, so maybe I had 2,000 options, and he accelerated them all. A standard plan has options mature over a 4-year period, but there was an acceleration provision. I felt really good that he was willing to go to the trouble to do it, and I didn't dare tell him that I was going from my 2,000 after 6 years at DEC to 5,000 in my first year at Intel.

BF: So you, like many executives, beat a path to Silicon Valley. This was still on the eve of the PC being introduced. What was the nature of Intel's business before the personal computer?

Vilandre: Let me take a step back. When I was at IBM, I had been there 2 months when they sent me down to Boca Raton, where the PC was in the middle of being born. Boca was set up for IBM's low-end strategy, and the idea was to come up with solutions that were outside the mainstream of IBM management. So Boca was set up to come up with a different way of thinking. The PC came along, and at that point Intel was not committed to PC-type thinking. While the microprocessor was clearly on Intel's radar as the way to go, they were still in the memory business.

To give you an idea of finance in the early days of semiconductors, Intel, along with Texas Instruments, was still in the watch business. Quite a few Intel senior managers came from TI and we were doing okay in the watch business, but our CFO didn't believe in it. He just knew that the consumer business was not the semiconductor business. And every single dollar or profit that Intel made on watches was put aside as reserves and wasn't allowed to impact the P&L. I still remember when we had gotten the chip in the watch down to $5 and everyone was feeling great that we had this $5 watch chip. The CFO walks in with one of the Micromas, which probably sold for $300, so it had a nice profit margin. The CFO says: “This is great news. But how do we get the $80 of gold in the band down to $5?” There was stunned silence in the room, and everyone quickly understood his point — which was that we were not in the gold business. It was a short time later that Intel decided to get out of the watch business. It never did hit the P&L — but in one sense it did, because Intel sold the brand to a company in Switzerland for a quarter of a million dollars.

The other shock about the watch business is that your big season by far is the Christmas season. Most of your sales are from October through December, but people have the right to return product and a lot of that product comes back in January and February. This was another aspect of the watch business that Intel management realized that it didn't know diddly about. So that, in combination with the price of gold and packaging, led Intel to get out of the business. There was some talk in the press about whether we had made the right decision, but a few years later, TI got out of the watch business and had to take a big write-off. Meanwhile, there was never a write-off at Intel because it had all been reserved from the very start by our CFO and had never hit the P&L. This is another example of how the West Coast thinks differently from the East Coast. Stock options may have become a cause célèbre, but they were a cause célèbre in the context of managing your P&L versus managing your assets or your balance sheet.

Jump to Part III

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