3DFX Message Board - Msg: 5776156

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Technology Stocks : 3DFX

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To: jwag who wrote (7340)	9/17/1998 1:58:00 PM
From: Sun Tzu	Read Replies (1) of 16960

As always Briefing.com is full of it. They simply reiterate the same parrot talk that has been around for ages. The string of stock buy backs that have been announced lately has less to do with the managements' belief in the underlying value of their stocks and more to do with covering their own behinds. A hall mark of the boom in stocks (esp. high tech) has been the ability of the companies to "cut" cost by paying their staff in stock options. As the stocks pierced through the roof, those option went in the money and many companies had to buy back the stock for which they had sold (now in the money) options. They soon realized that the gullible public hailed this on-going expense as great management and bought their stocks with even greater zeal. This in turn gave rise to higher stock prices with two dangerous side effects: (1) employees began to rely more on their stock options than their salaries and consented to accepting even more options as part of their compensation package. (2) The option went even deeper in the money. Nothing wrong with that, or so everyone thought. Except that this increased the financial obligations of many of these companies with respect to the issued options to the extent that they could not easily meet that burden and operate the company successfully. So they did the next dumbest thing (the street has not caught up to this yet); they orchestrated a synthetic buy back via derivatives (this is very common). A synthetic buy back is done by selling puts and buying calls from its proceeds. You can think of this as a "temporary buy back" where you have bought back your shares between Jan~Apr but will be re-issuing them when the option expires. The problem is now that the market has tanked, many of those put options are in the money. So the companies have the choice of paying for their mistake directly, or covering it up as "buy back". Guess which one they are going to do. Yes it will be the buy-back scam again. Only this time instead of the employees, it will be the outsiders who'll get the money. How? Simple. Say Gillet sold some out of money puts with strike of 60 back when they were at 62 for $3 a piece. Given that G is now ~$37 (and falling) those options are worth $23 for a total trading loss of $20 per option (Oooch!). Rather than revealing what a goof up they've done by paying the $20 price, G will announce a stock buy back. Only they are not going to be buying it back at today's price of $37, they will be buying it back from their put holders at price of $60. And the game goes on... Why is it that people can't get it in their heads that you never get something for nothing. Stock options and buy backs are no exceptions to that rule. Sun Tzu

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