In 1997, approximately five years before Allaire’s scheduled retirement, Xerox stock began to outperform the market. The stock reached a high of $63.69 on May 3, 1999 (see Figure 1). This was just one month after Allaire stepped aside as CEO and became Chairman, and Rick Thoman, with the support of Allaire, became CEO.
The 1999 Proxy Statement disclosed that Allaire had realized approximately $8.3 million on sales of stock from options in 1998. It also disclosed that he still owed approximately $57 million of exercisable options and $21 million of not yet exercisable options. For each 10 percent increase in the stock price, Allaire would make approximately $17.8 million, or for each $1 increase in share price, he would make a little more than $3 million. Thoman’s option position was less vested, but he had more upside over the longer run: For each 10 percent rise in stock price he would make approximately $27 million, or for each $1 increase in share price, he would make over $4 million. Both individuals clearly had a significant vested interest in the stock price.
“12 percent or better in 16 of the past 17 quarters,” and that the company’s goal would continue to be to “consistently deliver earnings growth of mid to high teens.” In effect, the predicted growth bar was raised, and some wondered how profits could grow at three times the rate of revenues. Revenue growth was predicted to be 5 percent for the quarter although year-to-year revenue growth for the first quarter was zero.
By July investors were getting suspicious. In retrospect, they had a good reason. The stock had fallen more than 10 percent when Xerox reported that it was in line with its targets for second-quarter growth of 13 percent in “core earnings.”