Hi Mephisto, looks like it's time
to start dealing with those stock
watering scams and other concept scams
and semi scams:
Microsoft, Yahoo Face Earnings Cut Under Stock Option Proposal
By Peter Robison
Seattle, Feb. 16 (Bloomberg) -- Many large U.S. companies, including Microsoft Corp., Yahoo! Inc. and Starbucks Corp., would have their profits slashed or erased under a Senate bill that would make them count the cost of granting employee stock options as an expense in company earnings.
If the proposed legislation had been in effect in 2000 -- when the biggest U.S. firms granted $162 billion of options, up threefold from 1997 -- Yahoo would have reported a loss of $1.26 billion instead of a $70.8 million profit. Earnings at Microsoft and Starbucks would have been 31 percent and 22 percent less, respectively, in fiscal 2001.
Michigan Democrat Carl Levin and Arizona Republican John McCain said that their bill would end a ''double standard'' that lets companies get a tax deduction when employees exercise stock options without having to count the options as an expense on their income statements.
``It's a good idea -- it fosters transparency,'' said Louis Kokernak, senior equity strategist with Martin Capital Advisors in Austin, Texas. Stock ``is another form of compensation, so it's fair game.''
Congress is moving forward with proposals to make accounting and corporate finance more transparent in addition to changing tax, banking and criminal laws in response to Enron Corp.'s bankruptcy filing. ``It is our intention to pass whatever new laws are needed before the end of this year,'' Senate Majority Leader Tom Daschle said Feb. 14.
Intense Opposition
The proposed options bill ``would be intensely fought,'' said C. Clinton Stretch, a partner at Deloitte & Touche LLP. ``There's just a tremendous number of companies that have stock option programs.''
The Financial Accounting Standards Board, an independent group that sets the rules for U.S. companies, tried in the early 1990s to make companies expense stock options as they grew in popularity as a form of compensation. Opposition from Congress and industry lobbyists forced the group to back off.
Since 1996, FASB has instead required companies to list in a footnote to their annual reports how much their profit would have been if an expense for options were deducted. The group still recommends that companies regularly subtract the costs from net income. Of the 500 biggest firms, only two -- Boeing Co. and Winn- Dixie Stores Inc. -- actually do.
Levin said stock options have become a form of ``stealth''compensation, allowing companies to ignore a cost and to benefit from billions in tax breaks. When an employee cashes in an option, the employer receives a tax deduction based on the difference between the option's exercise price and the market value of the stock.
Worth Billions
In the year ended June 30, that tax benefit was worth $2.07 billion to Microsoft, or 28 percent of the biggest software maker's net income, according to its annual filing with the Securities and Exchange Commission. A spokeswoman for Microsoft, which had net income of $9.42 billion in that fiscal year, declined to comment.
Cisco Systems Inc., the largest maker of equipment to link computers, listed its benefit as $1.4 billion in the year through July. Charles Schwab Corp., the biggest discount brokerage firm, had a $330 million tax benefit from stock compensation plans in fiscal 2000, 46 percent of its net income.
Blow to Earnings
If the value were fully expensed, earnings for the Standard & Poor's 500 Index would have fallen 12 percent in 2000 instead of rising 1 percent, according to a report by Credit Suisse First Boston.
Merrill Lynch & Co. analyst Steven Milunovich estimates that losing the benefit would cut technology companies' cash flow an average of 50 percent. The profit growth of companies in the Standard & Poor's 500 Index for the three period through mid-2000 would have been 9 percent annually instead of 11 percent annually, according to analysts at Bear, Stearns & Co.
More than 80 percent of financial analysts and fund managers say stock options are compensation and should be recognized as an expense, according to a survey conducted in November by the Association for Investment Management and Research. The group awards the Chartered Financial Analysts designation.
''Just because something has a negative impact on a company's earnings doesn't mean it isn't the right thing to do,'' said Chuck Hill, research director at Thomson Financial/First Call, which tracks earnings estimates. ``Why shouldn't you be including what's clearly an expense?''
`Jumbling Books'
Companies offer reasons why. One is that the value of options is hypothetical, based on the Black-Scholes option-pricing method. Using this model, two people can come up with different values for options depending on the assumptions they plug in, including the expected term of the option and the volatility in the underlying stock.
Investors would have to rely on a fictional measure that might misstate the options' true value, said Caroline Graves Hurley, director of tax policy at the American Electronics Association, a Washington-based trade group. ``It's a complete jumbling of the books,'' she said.
The group represents 3,500 companies, including Dell Computer Corp., Intel Corp. and Microsoft. It helped defeat a similar bill in 1997. Opponents may have difficulty blocking the bill this year if it becomes part of Enron-related legislation.
``This has been talked about for years and years,'' said James Schneider, Dell's chief financial officer. ``The question is how you actually booked this into your P&L,'' or profit-and-loss account.
Would Hurt Startups
Technology lobbyists argue companies would award fewer stock options under the plan, making it harder for companies early in their growth cycle to compete for workers with more established rivals that can afford higher cash salaries.
Reducing stock-based compensation may also make employees less responsive to investors, said Ray Hirsch, head of technology- stock investing at American Express Financial Advisors. ``I kind of like it the way it is,'' he said. ``It puts employees in the same box with the shareholder.''
Others said the stock-option craze has gone too far. Billionaire investor Warren Buffett, a critic of options, called current accounting ``Alice-in-Wonderland'' stuff in his annual letter to shareholders three years ago. Buffett typically eliminates option plans when his Berkshire Hathaway Inc. acquires another company, as it did with insurer General Re Corp. in 1998.
``If compensation isn't an expense, what is it?'' Buffett asked in the letter. ``And, if expenses shouldn't go into the calculation of earnings, where in the world should they go?'' |
