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

To: Freedom Fighter who wrote (76366)	2/21/2000 6:52:00 PM
From: Don Lloyd	Read Replies (1) \| Respond to of 132070

Wayne - [[...I believe your assumption is that there is always a 1 to 1 relationship between cash in/out and value. That is not the case. Widely varying multiples of earnings and price to capital are paid for businesses depending on expected and sustainable returns on capital, prospects, risk, etc... He is measuring economic reality from an earnings perspective. If he got to keep the 50 million but instead gave up a piece of Berskhire he would consider that a wash. No earnings. ]] Not quite. I'm trying to simplify as much as possible to see if I can get down to fundamentals. When I was talking about cash in and out, I was making a non-explicit simplifying assumption that the company had at least some cash balances (or other assets) on hand that are not required for the ongoing business. Thus cash in would simply add to that balance and cash out would not be large enough to eliminate the cash balance. If that is the case, any cash amount that Warren is willing to pay will vary directly $1 for $1 with that cash balance as it can be removed immediately after acquisition to be employed elsewhere. The option/no option situation becomes muddled because the business conditions before and after change. My claim is that a company that is able to make option grants is potentially making a mutually beneficial exchange with its employees, but the case must be made indirectly as follows: If there are no options, my mini-story claimed that the private business value of a company to a non-owner would always be increased by any secondary offering that produced positive cash, no matter how much of the company was sold for that cash. With this as a starting point, any option grant program can be compared to a secondary offering that is adjusted to produce exactly the same ownership and stock sale proceed results. Since the option grant program will additionally produce the benefits to the company of reduced salary requirements and tax deductions, it must also be positive to the company, only more so. This additional benefit may be lost when the company is taken private, but I think that only helps make the point, that when the option plan is in place, it is a net plus for the company, before existing shareholder considerations are taken into account, the same as with the secondary offering when the price per share finally comes into play. Regards, Don