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Technology Stocks : Network Associates (NET)
NET 184.79-10.3%Jan 28 3:59 PM EST
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To: Geoff Nunn who wrote (2997)7/30/1998 6:31:00 PM
From: Chuzzlewit   of 6021
 
Geoff, you wrote Concerning dilution, I'm not sure I understand what you're so phobic about.

Here's the problem. When an acquiring firm issues stock to purchase another profitable company total earnings increase. This generally results in increased bonuses for management regardless of the implied price they pay for the company. This does not happen as easily when cash is used because that precludes pooling of interest transactions. There is also the loss of interest income that results from cash transactions. Furthermore, cash makes it much easier to see and apply the appropriate hurdle rates. Stock-based transactions obscure much of what is happening under the hood. And as you know, I generally don't trust management when their bonuses are driven by short-term performance measures.

I wonder whether T would ever have considered purchasing TCOM if the transaction would have depended on cash. It could have been done in two steps. First issue sufficient equity or debt to raise the needed cash and then purchase all of the o/s stock. Do you think s/h would have stood still for that?

You are correct in suggesting that I wouldn't object to a well managed company issuing stock to finance capital expenditures, but this is fundamentally different than buying another company.

Now your argument that It appears to me that failure to do share buybacks sends the same wrong message, which that the stock is cheap (overvalued). is suspect IMO. Share buybacks are simply tax efficient methods to effect dividends through dividend reinvestment. They do not change the capitalized value of the company. They also tell the shareholders that the best use of their money is to reinvest it in the stock. Purchasing plant and equipment or another company for the cash argues that external opportunities exist which are better investments and should increase the capitalized value of the company.

TTFN,
CTC
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