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

To: Freedom Fighter who wrote (76302)	2/21/2000 8:27:00 AM
From: Don Lloyd	Read Replies (2) \| Respond to of 132070

Wayne - [[...Just for the record, I do not think your arguments about this are without merit. In fact, I think they are extremely well reasoned and probably correct. I still just find it necessary to try to estimate the impact that the substitution of options for cash is having on reported results. Here's an example. When Warren Buffett bought General Re he immediately substituted a cash compensation plan for the existing stock option plan. There was an amount of cash that the management of General Re deemed satisfactory in order to get them to give up the options. Despite all the complications of that measurement related to taxes, stock price movements, repurchases, etc... I do believe it is useful to calculate that theoretical value for valuation purposes. I do it both ways. You did not fail to educate me.]] Thank you for the reply and the example. I think you've given me the raw material for an irrefutable example which I'll test below. After a thorough analysis, on January first, Warren Buffett has calculated that a fair offer for 100% ownership of XYZ Corporation would be $1 Billion. Since his new cleaning lady has temporarily misplaced his pants, he can't make an offer until he locates his spare change, and he determines to recalculate the fair value every Saturday until he actually can make an offer to take the company private as a fully owned subsidiary of BRK. In the first week, the XYZ corporation announces a 2:1 stock split, effective immediately. While Warren knows that stock splits virtually always increase the market value of a company, he stubbornly refuses to raise his $1 Billion estimate of fair value. On Tuesday of the second week the Chief Financial Officer of XYZ goes berserk and distributes the entire lot of treasury shares to every other passerby in Times Square. These untraceable shares have increased the total share count by 20%. Warren yawns. Fair value for 100% of the company is still $1 Billion. In the third week, XYZ makes a secondary offering, selling 1% of the company for $100 Million dollars. This wakes up Warren and he raises his fair value estimate to $1.1 Billion to reflect the secondary cash proceeds. In the fourth week, XYZ makes an SEC filing, noting that an editing error has been made in the secondary offering. Instead of selling 1% of the company for $100 Million, 25% was actually sold. Warren rolls over and goes back to sleep. Fair value is still $1.1 Billion for buying the business. On Wednesday of the fourth week, XYZ management receives a tip from Warren's former new cleaning lady that Warren may be interested in buying the company. In a desire to hasten the process, XYZ management researches all of Warren's pronouncements on company valuation. It decides that Warren doesn't care for employee option grants, so it buys back all the grants for $100 Million. Since Warren is tied up in a cutthroat bridge tournament carried over from Friday night, he can't be bothered to make a full new valuation on Saturday morning, so he merely cuts his estimate to $1 Billion to reflect the option grant buyouts. During the fifth week, the former option grant holders have second thoughts as they realize that $100 Million won't last forever and they threaten to strike or leave unless they receive a pay raise. Recognizing the logic of this demand, XYZ increases salaries by 10% across the board for the former option grant holders. After a good night's sleep, Warren revalues XYZ downwards to $850 Million to reflect increased compensation expenses and lower margins. Please try to pick holes in this argument, as I think that the implications should be clear, and I'd rather see if you end up at the same place. Regards, Don