Cisco Systems, Inc. (CSCO) Message Board

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Technology Stocks : Cisco Systems, Inc. (CSCO)

CSCO 73.34

-0.1%

1:32 PM EST

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To: RetiredNow who wrote (57438)	2/11/2002 12:31:54 AM
From: Stock Farmer	Read Replies (1) of 77400

Multi Part Reply Part 3: Options & Shares Stock Options We started our little debate here many moons ago by noting the degree to which Cisco's cash flow was dependent on stock options. Speculating that without as much of this poorly understood option cash flooding in, we would start to see how much the business is actually contributing in terms of cash flow. That 21 Billion dollar pile of cash, where did it come from? Because the real question for folks who would value an entity with a pile of twenty someodd billion in equity at 130 $Billion is "where's the remaining hundred and some odd billion going to come from?" As long as the answer looks like "the same place where the last twenty someodd came from", count me out. See "Additional paid in capital" Message 17043618 So you are right on in terms of looking at the degree to which investment gains and losses are contributing to income and cash flow. Get the option smoke out of the way and more folks will be able to clearly see how big the real fire is. Those who took the care and subtracted it in the first place had a bit of a head start. Contrary to your view of my concerns, I am not concerned that options are currently a big inflator. I am concerned that folks still haven't yet figured out the size of the thing that was being inflated. OS Shares. You mention that it's good news that the company is finally taming dilution. And we are agreed. Partially. As good as this is, beneath the surface the appropriate question is: at what cost. Burning $250 Mil of shareholder equity to retire $250 Mil worth shares at a Price:Equity ratio of almost 5:1 is not exactly great leverage. But this bed was made years ago, so perhaps management is making the best of a very bad situation. At least they weren't buying back in at much higher bubble prices. Quantify the issue another way. In the 10-K they disclosed 481 Million stock options issued with strike prices between $0.00 and $18.57. If these are all exercised at a weighted average price of $20 the net inflow to the company will be approximately 6.4 Billion in terms of cash from exercise and tax benefit. The cost to retire these extra shares at the same weighted average $20 will be 9.6 B$, for a net pending liability of 3.2 Billion. Which when added to the size of the outstanding goodwill is about the same size as Cisco's lifetime retained earnings. Which must certainly be "material". The cost becomes less material only as the share price drops, and vice versa. Unfortunately. For folks holding shares, that is.

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