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Strategies & Market Trends : Gorilla and King Portfolio Candidates

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To: StockHawk who wrote (24147)	5/3/2000 11:44:00 PM
From: saukriver	Read Replies (2) of 54805

MSFT--Contingent Liabilities on Put Warrant Obligations Your post made me recall why I dropped out of accounting in college. Cash, which is an asset, will be used to buy the stock. After the transaction there will be less stock outstanding. Since Earnings Per Share is calculated based on the number of shares, and since there will be fewer shares - the transaction will have a positive effect on EPS. As as a shareholder, your portion of ownership in the company will increase . . . . The part I don't get is that SHs would then own more of something with less in it. If I own a greater percentage of an emptier glass, how is that positive for me? If you and I each own 10% of the water in a glass and you drink all the water, I really don't feel any better if you then give me your 10% of the water in the glass. If all the Iridium shareholders mail you their stock certificates, you will own all the equity in Iridium. But will you feel wealthier? Wouldn't the cash losses on the MSFT investments in put warrants somehow have to be captured in its accounting? If I take in $1 in licensing revenue and shell out $3 to purchase my shares, don't I have to at some point report a loss of $2? Microsoft has reported an ever increasing amount of revenue from its investments. Shouldn't it have to report losses on put warrant investments at least to the extent those losses dwarf the benefit of fewer shares being outstanding? Isn't that like a bad contingent liability being visited on the corporation? And at what point does the cash losses associated with such liabilities have to be reported? If a corporation's business is to do nothing but agree to buy back its shares at its current price, that business should be quite sustainable as long as the price of the corporation's shares keeps going up. But what about when the share price begins to fall? Surely that business becomes unsustainable as the price spirals down. And at some point as the company has to shell out more and more cash it must be worth less to the fewer remaining shareholders. saukriver

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