Greg any comments on this :
Take Cisco, the archetype of the New Economy. In the year to July 2000 Cisco reported net income of $2.668 billion, or $0.36 per fully diluted share, up 24 percent from the prior year. However, in the same year, employees exercised options on 176 million shares, at a weighted average exercise price of $5.75 per share. New options were granted on 295 million shares, at a weighted average price of $52.10 per share.
Making the rough assumption that the market price when new options were granted was the same as that when old options were exercised, we can calculate the net transfer of wealth to employees from 1999-2000's option exercises under the Cisco share option scheme, as $52.10 minus $5.75 per
share, or $46.35 per option exercised. Multiply by 176 million options exercised, and you get a total wealth transfer from stockholders to employees, entirely outside Cisco's income statement, of $8.158 billion.
I see no difference from the stockholders' point of view between paying employees via stock options or paying them in cash; either method removes wealth from the stockholders. If Cisco did not give stock options, they
would have to pay employees much more to keep them; the stock options are merely a form of executive compensation, a very expensive one in Cisco's case. Taking this into account, instead of a net income of $2.668 billion in
1999-2000, Cisco stockholders actually suffered a net loss after stock option exercises of $5.49 billion. Repeating this arithmetic for previous years demonstrates that Cisco has not made a true profit in any year since at least 1996.
Thus Cisco's entire market capitalization, currently around $360 billion, is based on earnings that are in real terms consistently negative, but are not clearly reported as such. To me, that smells like fraud. |
