Peter - sorry for delayed response. Been away in the real world. A few days without Internet is refreshing.
As you suggest, perhaps we should explore some common ground?
It occured to me that while I am coming at this whole Option Compensation thing from the perspective of assets, you are coming at it from the perspective of stock price and I would like to understand this point of view.
So you wrote: The cost to existing shareholders of employee options is dilution. The actual $ cost to shareholders is the reduction in market price per share caused by this dilution... The market should reduce the share price by a percentage equal to the dilution.
Assuming that the market price of a share represents the fair share of the firm's expected present value future assets, then yes, I agree fully.
Then you wrote: Do you agree that the only way to measure actual cost to shareholders is effect on share price?
What "effect" are you talking about? Do you mean the effect on price when a stock like Qualcomm goes from $24 to $200 and then back down again? Or did you mean this in a more theoretical sense, as in "slice something into more pieces each piece is worth less" kind of effect.
I am more agreeable to the latter. And I think this is what you meant.
For example, I think we can both agree with Buffett that a fair price for a share is assets plus the present value of the expected future profits, divided by the number of shares outstanding. Or A/N where A is this total expected asset value and N is the number of outstanding shares.
If we don't agree on this, then we're going to have a tough time agreeing on much at all.
Second, that if the company prints n new shares and receives a price of S per share, then in the moment of the transaction the company sees assets increased by the amount of cash it receives (n*S) and share count go up (to N+n). This is the general case of change in capitalization. Works for stock splits (try S=0, n=N for a 2:1 split), stock buyback (n < 0)... anything.
Again, I think this is pretty clear, but before we get into anything on which we might disagree, it will be easier if we have a solid foundation on which to rest.
What do you think?
John. |
