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Technology Stocks : Cisco Systems, Inc. (CSCO)
CSCO 81.56-1.9%2:27 PM EST
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To: RetiredNow who wrote (67934)5/20/2005 7:47:05 PM
From: pfalk  Read Replies (1) of 77400
 
Mindmeld said: That's interesting, but I'm not sure I agree. A company will do whatever it takes to increase the stock price......

Mindmeld, It's just me cynically pointing out that management chose one of all those legal ways of spending the money, that coincidentally happens to benefit them personally the most.

If they spend 12.5 B$ on stock buyback they will enrich the shareholders by reducing the number of outstanding shares by 10% thus increasing the value of all shares by approx. 10% This will result in further dilution (because more options will be in the money). This will reduce the 10% increase to something less, depending on the number of options that now become "over water", thus reducing the likely increase of shareprice from 10% to something less, say 8.5%. The difference goes into the pockets of the holders of Stock optionns.

If on the other hand they spent the 12.5 B$ on a one time dividend, then all that money would go to the existing shareholders, which would (probably) not result in a share price hike, thus no increase in "options in the money". BUT all the existing shareholders would still see the value of their shares plus dividends increase by 10 %.

(I chose 12.5 B$ because that is exactly 10% of current market value, just to make the math simple)

My point is exactly that the management is VERY smart at Cisco, but that shareholders aren't necessarily the primary benefitiaries of this.

This is what I mean when I say that ESO's are a "tax" on shareholders future increases in share price.

P.
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