Good post.
While the market may believe that a share is worth $60 or $13, that worth is built on expectation that ownership of that share will generate future cash flows - and by that, I mean total cash flows that can be claimed by equity holders. The impact of investments count. The paid-in capital by options exercizers count. The dilution of additional share issuance counts against you. Buying back shares counts as cash out and total shares reduced. Totally agree.
Over the period in question, most of the shares issued were options. About half, actually. Mindmeld and I went over this in excrutiating detail about a year ago.
For most of the options exercized over the last 6 years, the current price is considerably lower than the strike price at which the option was exercize. Could I not argue that the options program actually generated wealth since the options holders "overpaid" for their shares? Absolutely. However, the poor shareholders who bought them also paid an even higher price. So while the employees enriched the shareholders through the company, they empoverished shareholders to a greater extent. Net loss to shareholders. Sorry.
Furthermore, many of these options have not been exercized at all - we consider them diluted shares because of their future claim on cash flows, but since we are only considering wealth created in a discrete timeframe, shouldn't we exclude them since their paid in capital impact will be in the future if at all. In any case, I should not subract the market value of the securities underlying the options from cash flows - employees were given options NOT stock. Yes. There are 1.2 Billion outstanding unexercised options. Some of which have more claim on future cash flows than others. The proper accounting is to add into cash flows the proceeds of dilution expected, and then divide the total expected cash flows by the amount of the diluted shares. That's for "fully diluted" view. For an undiluted view, then ignore. Since it is hardly reasonable to assume that employees will fail to exercise in-the-money options, an undiluted view is not reasonable. Neither is a fully diluted view, IMHO (I'm not that optimistic about the stock price).
The wealth creation calculation should be pure and simple. (LIQUID cash value of assets at end of period/ending FULLY diluted shares) - (LIQUID cash value of assets at beginning of period/beginning FULLY diluted shares). The value of options granted will be determined at the time of execution. We can try to estimate the costs to match them with income statement revenues but there is no such estimation on a cash flow statement. It is either cash now or it isn't on the statement.
Hmmm... seems we view the term "creation" differently. Try this.
You own 100 shares of a company with no assets and no liabilities. I offer to buy 100 shares from the company at a price of $1.00. And mindmeld, who has 50 stock options at the price of $0.10, decides to cash in on my generosity.
So the company prints 100 shares: 50 for mindmeld, for which they get $5.00, which he promptly sells to me for $50, pocketing the $45 difference. The other 50 I buy direct from the company. The company now has $55 in assets, no liabilities and no debt. You own 100 shares and I own 100 shares.
Let's look at the "wealth creation" that just went on.
You are wealthier by $27.50, which is your half of what the company is worth. So you might see some wealth creation going on. I too am wealthier by $27.50 - you might think. Only I used to have no shares and $100. And now I have shares that give me claim on $27.50, and my $100 has gone.
If we add it all up between you and me (the shareholders) there's been minus $45.00 wealth creation going on. And it's all due to mindmeld!!! :o)
I think it's important to be very very clear about the point of reference around which we measure "wealth creation". In my opinion, it should be the sum of shareholders, net of effects. Including their generosity.
John |
