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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Richard Nehrboss who wrote (67713)	9/15/1999 10:30:00 AM
From: Freedom Fighter	Read Replies (2) \| Respond to of 132070

Richard, >>I'll rest peacefully as randoms spew nonsense stating that if ESO's were properly expensed, most of the S&P 500 would be loosing money, or at least taking a hit of 50% to earnings.<< I don't think it's as clean as that. The fact is that numerous companies are not immunizing themselves from the potential for a large appreciation in their stock price even though they theoretically could. So as options are exercised and shares repurchased, enormous amounts of supposed free cash flow and earnings are in fact vanishing from the balance sheet and shareholder equity. It's my view that these amounts should not be charged to earnings because it is unlikely that the companies intended for compensation to be that high. Nor is it likely that similar appreciation will be seen in the future. But there is NO doubt that for some companies 20%-50% of supposed earnings is vanishing due to the repurchasing of exercised shares. These repurchases are not benefiting existing shareholders. They own the same percentage of the business as they did at the start. So even though the earnings overstatement is probably best measured by looking at the theoretical value of the options at grant time using reasonable input assumptions (that's how Warren Buffett does it) the vanishing free cash flow is definitely a significant valuation issue, albeit a tough one to quantify. There are also re-pricing issues. Andrew Smithers of Smithers and Co Ltd. has done the best research on the subject I have seen and covers repurchases, Black Scholes, immunization, and other areas. Wayne Crimi

To: Richard Nehrboss who wrote (67713)	9/15/1999 11:20:00 AM
From: Michael Bakunin	Read Replies (1) \| Respond to of 132070

..well, there are still arguments, but I feel Smithers and Parish are alarmist; reality is bad enough, no exaggeration necessary. Investors can work through the footnotes, and I expect (hope) that the semi-efficient market thinks about them. Your remaining worry in extreme cases, like MSFT's, is that cash income under current rules is leveraged to the stock price, due to the tax shield on exercise. If the market goes down, all else being equal, MSFT earns less. -mb