Does Dell make money or if stock options were accounted for properly, does it make nothing? Does Dell's use of puts mean its options cost it very little? Who understands the following thread from aol and can explain what is going on clearly so even I can understand? The thread is long.
Subject: GreenSpan and overstatements.... Making $ on stock bets
From: jonkai@aol.com (JonKai)
Date: 01 Sep 1999 17:16:08 EDT
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Subject: Re: Making $ on stock bets
Date: Wed, 01 September 1999 12:05 AM EDT
From: Oliensis
As Greenspan said last Friday, it appears that Employee Options account for something like a 1 to 2% overstatement of Earnings of publicly traded companies, but it appears that the Expensing of costs that could and perhaps should be amortized as Capital Outlays on the part of publicly traded companies (such that the Expensing of those outlays cause UNDERSTATEMENT of earnings) probably more than outweigh the 1 to 2% overstatement caused by Options.
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well, i'm not sure where Mr. Greenspan got the 1 to 2% overstatement..... but in high tech companies, it is more like 50% overstatement...... here is a excerpt from a nationaly recognized economic authority "economist"
Share and share unalike
FASB did, however, manage to make firms include a footnote in their accounts detailing the share options awarded during the year. Smithers & Co., a research firm in London, calculated the cost of these footnoted options and concluded that the American companies granting them overstated their profits by as much as half in the financial year ending in 1998. In some cases, particularly that of
high-tech firms (which tend to be generous with options), the disparity is even greater. For instance, Microsoft, the world's most valuable company, declared a profit of $4.5 billion in 1998; when the cost of options awarded that year, plus the change in the value of outstanding options, is deducted, the firm made a loss of $18 billion, according to Smithers
jon.
Subject: Re: GreenSpan and overstatements.... Making $ on stock bets
From: oliensis@aol.com (Oliensis)
Date: 01 Sep 1999 17:51:18 EDT
Don't you get it, Jonkai?
1) Dell grants the option to employee.
2) Dell sells the put.
3)Dell buys the call.
Now if the stock doesn't go up, Dell gets put the stock at a low price.
and the cost to Dell is not so great.
If the stock does go up, then Dell exercises the call and gets the stock on the cheap...which it then gives to its employee for cost that is not so great. The fact that what the employee gets is worth a lot is of no direct fiscal value to the company. It does not show up in the company's books. Whether the stock goes up or not, the cost of the option is the same to the company..The employee reaps the benefit or not.
It's called a hedge. The cost of the employee gettin the option is the same to dell irrespective of whether the stock goes up.
Now if some website wants to calculate the price of the stock that's given to the employee via his option as $ that the company is counted as having made by trading in its stock, that makes no sense whatsoever.
It's just journalism. Yuck. They gotta sell a story.
No more comments from me on this subject.
Dell resting after huge up yesterday.
Oliensis
Subject: Re: GreenSpan and overstatements.... Making $ on stock bets
From: jonkai@aol.com (JonKai)
Date: 02 Sep 1999 00:31:27 EDT
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Subject: Re: GreenSpan and overstatements.... Making $ on stock bets
Date: Wed, 01 September 1999 05:51 PM EDT
From: Oliensis
Don't you get it, Jonkai?
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aaaaww, yes Oliensis, I understand the mechanics of the trade perfectly..... my post had nothing to do with the mechanics of the trade though......
it had everything to do with the fact that this journal had a number that is way different from Mr. Greenspans, and it would be nice to know who was closer to correct.......... because companies overstating income by 50% due to huge stock dilution due to a rate of stock option granting that is spiraling out of control is very dangerous ....... no matter what mechanical means they use to do it. so I would like to find out what the true number
is......
but don't get me wrong, i like to discuss the mechanics of the option scheme too..... if you wish......
for example this statement below is wrong, the company's "books" most definitely benefits directly from this scheme.
The fact that what the employee gets is worth a lot is of no direct fiscal value to the company. It does not show up in the company's books.
it's wrong because the company gets to keep the premium of the short put option, and it rakes in the benefits of tax advantages too...... and I showed you a cash flow statement that shows the company's "books" benefiting from those two areas before in a previous post........
anything that adds cash to a company's cash hord most definitely benefits the company in many ways...........
jon.
Subject: Re: GreenSpan and overstatements.... Making $ on stock bets
From: oliensis@aol.com (Oliensis)
Date: 02 Sep 1999 09:34:38 EDT
Jon, the company gets to keep the premium from its short puts irrespective of whether it gets put the stock.
And the company will then buy the stock at the same price irrespective of whether it has gone up. So the only difference is in what the value is of what is delivered to the employee. It costs the company the same either way.
BTW. I read the entire article you linked from The Economist. It's unsigned...no author. And full of unsupported generalizations anc conclusions based on "Experience shows us" and "as everyone knows" ...about things that experience has not shown, and which everyone does not know.
The article makes the same mistake that I believe you are making. It assumes that the value of the stock delivered to employees is the same as the cost of those shares to the company. It then turns around and accuses the company of makin money on those sharea and juicing its books w/ that money.
In fact what's going on is that the companies are hedging out the cost of compensation to employees so that it does not cost them to pay as much to employees. If the shares don't appreciate, the one with less money is the employee for having been delivered less $ in the form of shares. The RISK is assumed by the employee while the company assumes a fixed expense (i.e. max. cost of shares will be determined by the short put and long call to be
exerercised. )
One more thing:..
As with any option employee options are not counted as fully transacted until they are closed.
If I sell a put today, and buy it back next year, the income from the sale and consequent repurchase is not taxable until next year. Likewise if there's a loss.
The option which I am short (like a company is short the employee stock option) is not calculated for any purposes of import until that option is closed. Likewise with Employee Options. Of course when a company buys a share of its own stock, it must reduce its cash on hand by the amount of the purchase. And if it holds shares of stock in its vaults, it has an asset. If it gives that asset to an employee, it has lost that asset.
So if Dell owes stock to an employee, it will have to come up with that share either by giving the employee shares, buying back the shares for which Dell will incur an expense, or by issuing shares which will dilute its price per share.
Most people who write about companies owing huge amounts of stock and cooking he books with making $ on their own stock don't fathom how risk is hedged and how options are accounted for. And they accuse the companies of wrongdoing for both reaping the benefit of acquiring their own shares on the cheap, and for then giving those shares away to employees with hedged risk.
Oliensis
Subject: Re: GreenSpan and overstatements.... Making $ on stock bets
From: jimisays@aol.com (JIMISAYS)
Date: 02 Sep 1999 10:26:00 EDT
> here is a excerpt from a nationaly recognized economic authority
>"economist"
the dismal science - only good in academics - these folks don't even make "widgets" - their use to the world is hugely overstated
> Smithers & Co., a research firm in London, calculated the cost of these
>footnoted options and concluded that the American companies granting them
>overstated their profits
as we used to say in motocross racing "we don't care how thay do it in england" (it was calif actually) but you understand - and oh yeah i always thought england was a rather backward country - especially in business - maybe they have too many useless economists - i don't know
> For instance, Microsoft, the world's most valuable company, declared a
>profit of $4.5 billion in 1998; when the cost of options awarded that year,
>plus the change in the value of outstanding options, is deducted, the firm
>made a loss of $18 billion,
this is the future value of options granted - and will be paid for - 100% by the increase in stock price - the stock don't go up - nobody will exercise options that are worthless - make sence???
>, according to Smithers
>jon.
i figured this was an article only a bear could love - go dell - keep on pumpin options to the loyal employees who make the company the powerhouse pitbull that it is!!!
Subject: Re: GreenSpan and overstatements.... Making $ on stock bets
From: jimisays@aol.com (JIMISAYS)
Date: 02 Sep 1999 10:31:01 EDT
>Don't you get it, Jonkai?
>
>1) Dell grants the option to employee.
>2) Dell sells the put.
>3)Dell buys the call.
he don't get it - he must be an ecomomist!! probably a professor even!!!
Subject: Re: GreenSpan and overstatements.... Making $ on stock bets
From: jonkai@aol.com (JonKai)
Date: 02 Sep 1999 20:23:49 EDT
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Subject: Re: GreenSpan and overstatements.... Making $ on stock bets
Date: Thu, 02 September 1999 09:34 AM EDT
From: Oliensis
BTW. I read the entire article you linked from The Economist. It's unsigned...no author. And full of unsupported generalizations
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you must of missed a few spots, the article is riddled with "bill parsh said" that, "smithers says" this....... even the piece a cut out for the post has an author..... right at the end......
and on the contrary; I do say that the cost of shares to the employee is different than that of the company,, sometimes a company will just print up a new share, for the 3 cents it costs in paper and ink, yet still sell puts like they are going out of style......
jon. |
