Larry Ellison and Billionaire Spending

As someone in the financial industry personal finance is something that is always interesting. If you are really interested in how even the rich can go poor I suggested Robert Frank’s “High Beta Rich” which has great stories of how even the top .01% can become the bottom 99% or even in some cases bankrupt. When I saw this story about Larry Ellison increasing his line of credit to $4.5 billion I began to wonder why he even has a line of credit.  Basically Ellison was using Oracle stock (company he founded) as collateral in order to pay for things he shouldn’t be buying (an island for example). According to Bloomberg Billionaires Index Ellison is worth around $38 billion. Larry Ellison is one of the highest paid CEO’s. For the past fiscal year Ellison made $96 million ($90.7 was due to stock option awards which few people actually know take years to get since they are actually restricted stock where an executive may have to wait 3 to 7 years even before they can cash out the options). Essentially 95% of the stock price is tied not the short term performance of Oracle but the long-term (3-7 year period) after the shares are awarded that matter. People forget the options Oracle gave Ellison could be worth less than the $90.7 quoted in the future if Oracle were to tank or not create shareholder wealth. According to this WSJ article Ellison between 2001 and 2010 made roughly $1.84 billion being the CEO of Oracle. If I do a performance chart of ORCL (Oracle) over the same period of time the stock was down close to 16%. Is Mr. Ellison overpaid?

It seems though that even though Larry Ellison is raking in the dough he is also spending a lot of it as well.  Usually people never change (even if they say they have). I found this great article published in 2006 from the SF Gate detailing Ellison’s ridicioulous spending  (even by billionaire standards). Phillip Simon who was Ellison’s accountant in 2002 told Ellison “I’m worried, Larry…I think it’s imperative that we start to budget and plan”. Apparently Ellison was living the really good life. He was spending $20 million on his “lifestyle”, $75 million on interest, $25 million on a villa in Japan, $194 million on a new yacht, $80 million on the American Cup and a random $12 million on UAD (which no one seems to know what it is).  He did build an insane $200 million Japanese style house. He is also charitable and wanted to increase the funding from $35 million to $100 million per year. This is all of course excluding the money he spent on Gulfstream and Cessna jets, cars (McLaren F1 car), Armani suits, and financing all these purchases by borrowing against his Oracle stock. I just hope Larry doesn’t one day face a margin call. Keep in mind at the time Ellison was worth closer to $17 billion. Not only was Ellison spending a lot but breaking one of the first rules of personal finance which is diversification. No one should have their net worth tied to one stock no matter how high quality it is since you never know what can happen in the future. Larry’s financial advisor was trying to diversify him out of Oracle stock however Ellison was increasing his ownership interest. 

Ellison started his company with only a dozen employees and had software that was being used by credit card companies, hotels, and airlines to process transactions. Now Oracle’s s software is used by over 70,000 government and commercial customers and has 115,000 employees.  Ellison was no whiz kid in school either. He left the University of Illinois during finals and ended up not taking them. He in fact remembers one exam where he just sat for an hour because he knew he had to spend 3 hours answering the questions. Larry did end up taking some physics classes at the University of Chicago which seem to interest him and lead him to actually lead him to computer programming. More of Larry’s story is told in the book “Softwar”.

Ellison basically came from nothing to build a business that earns billions of dollars per year. I admire this since he wasn’t given a business or just an inheritance to build it. Although, Ellison has built a successful business there are still laws of financial planning he has to follow like diversifying his stock, trying not to use Oracle stock as collateral, and not spend so much. I just hope that Ellison doesn’t end like other CEOs who financed themselves so much that they lost everything.