Hi Richard Tsang; I'll try to answer your questions, they
are good ones:
1. The outstanding options is 110 million shares and
all should be accounted for in calculating the dilution
effect...
When companies compute earnings per share, they
normally use a "fully diluted" basis. This assumes
that all in the money options and convertible issues
are converted. I think we all agree that this is the
way to do it. I'm not sure but what out of the money
options are also assumed exercised in a "fully
diluted" earnings calculation. Perhaps somebody
else will give a final statement about this.
2. I agree that the buyback is a decision of "better
use" of money to create value for company. However,
I would think that if they did not issue any stock options,
the need to buy back would not have been considered,
therefore all the money will have stayed as retained
earnings in the equity accounts which belongs to
shareholder, instead of being deployed to.
Companies that have issued options sometimes don't
buy back stock. Companies sometimes buy back
stock that haven't issued options. The two things
just aren't connected. If a company wanted to buy
back stock, it might choose to buy back just enough
to equal its options grants, but it is an arbitrary
decision.
3. The decision to issue stock options and how
much to issue to what ranks, etc., rests with the
management who are the main beneficiaries of
such program. The decision to buy back shares to
boost up the stock price is also theirs. I do not think
that this is healthy practice. It may be an ethica
issue, IMO. I have seen companies borrow money
to buy back shares to reduce float and boost EPS,
and profit from the rise in stock price as a result (Dell
is not in this category as they have plenty of cash).
I agree completely, and would also like to note that if
the price of DELL drops in the next few years, those
employees will probably get their options restruck at
a lower strike price. This always tees off the stock
holders who suffer without such an advantage. On
the other hand, I have been the recipient of restruck
options, and it contributed to my not leaving the company
for greener pastures.
4. I was once told that the actual cost of the
spread (difference between the option price and
fair market value on date of exercise) on those
that were exercised in the fiscal period can be
made a tax deductible expense by way of footnote
in the corporate tax return. If that is true, it means
the tax authority does recognize such cost as
"business expense". Have you seen any such
"footnote" in public reports?
This is true, but the usual option term to describe
the (tax) accounting is that companies can expense
the "intrinsic" value of the option at the time it is
exercised. The money may show up in the employee's
W-2 form as regular earned income (with social security
taxes owed), depending on when he exercised, and
what he did with the shares. I know how the rules
effect the individual, but I am a little fuzzy on how
they end up on the company's taxes.
Anyway, tax accounting and GAAP are two different
things. Companies keep two sets of books. The
one for the IRS generally show lower earnings, as
the companies take advantage of tax rules
to minimize their taxes. What we are talking about
here is a tax loop-hole, and is an advantage to
the company, and to the shareholders, as it
decreases the taxes paid on an event that actually
brings cash into the company (i.e. the strike
price). But the event does not show up on the
income statement, nor should it. The income expense
happens at the time of grant. You could argue that
the expense at the time of grant should be amortized
over the vesting period, but I don't think they do this.
In any case, the amortized value of options granted
on DELL would be minuscule, as the company originally
went public at $.35 per share, after splits. Thus the
original options would have fair market values much
less than $.35 per share at the time of the IPO.
I had forgotten just how complicated this subject
can get!
-- Carl |
