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

To: Skeeter Bug who wrote (76309)	2/20/2000 1:14:00 PM
From: gnuman	Read Replies (1) \| Respond to of 132070

SB, re: Cost of options. I think the real question is, "where would the company be without the talent the options attracted?" (And of course the options inflated over time along with corporate valuation). Options and valuation might have some relationship. I think one of MSFT's problems today is the price of new options. The good guys may prefer a dot.com start-up to a maturing industry with slowing growth, (at least by historical standards).

To: Skeeter Bug who wrote (76309)	2/20/2000 2:52:00 PM
From: Don Lloyd	Read Replies (1) \| Respond to of 132070

SB - [[there is actually a very large cost when employees exercise options. the company creates new shares, collect some $$ from said employee and the employee gets the stock. lots of accounting smooze follows. no cost to company? well, imagine that the stock options aren't granted, all else being equal. hmmmmm... the company could still printed and gave away said shares. this time they kept that money - all of it! that is what the company loses. right now, msft is going to lose the opportunity to sell $60 billion worth of shares and KEEP THE PROCEEDS. why? employee stock options. that is REAL MONEY the company REALLY loses out on.]] My take is that one secondary offering in no way precludes another. Option grants in no way preclude a secondary offering as well, IFF the corporation judges that to be in its best interest, however defined. In a secondary offering, shareholder dilution is created in exchange for cash based on current market prices. No other cash flows result, AFAIK. For an option grant, future shareholder dilution is created with high probability and the exercise proceeds are received in the future based on roughly the current market price. This should correspond closely to the cash received in the secondary, but delayed. In addition, the corporation receives a current real benefit of lower employee salary expenses, everything else being equal. Also, the corporation will receive a future real benefit of a tax deduction for the implied employee compensation. In the case that options are never exercised, no dilution occurs, there are no exercise proceeds or tax deductions, but the salary reduction benefit still remains for free. If a secondary offering were made and then the corporation bought back the shares later at a significantly higher price, it could be justifiably criticized if the secondary proceeds have not been re-invested for a high rate of return. Thus, without immediate capital requirements, or strong investment opportunities, the secondary offering can only be seen as a bet against stock price appreciation. If this is not a desirable bet, then the option grants are certainly not a cost, even if a corporation for whatever reason feels unable to do both. After a full cycle of option grant and exercise, the resulting situation can be very similar to having made a secondary offering, but with what is probably a larger total of cash flows and the ability to report higher interim earnings, less tied to actual operational results and usually resulting in a higher stock price trajectory. Regards, Don Just to be clear, I believe that the combination of poor market valuation methods and unrealistic accounting procedures tend to inflate stock prices beyond reason. It is also perfectably understandable why corporations undertake their operations in such a way so as respond to existing valuation and accounting rules, no matter how little sense they make. However, I also believe that trying to bandaid the problem by adding a phantom compensation line is economic nonsense.