Hi Kemble,
Re: But the change in the wireless strategy is significant for another reason--it signals a dramatic shift in how Dell conducts its business.
The PC manufacturer is known more as an imitator than as an innovator, according to analysts. "Typically, Dell waits for a market to mature before making any serious commitment of resources," said International Data Corp. analyst Roger Kay.
But things may be changing at Dell, which last week unveiled an MP3 home stereo component developed with digital music specialist S3. The branded music system is part of Dell's expanding focus on leading rather than following, according to analysts.
This is absolute key!!! Rudedog has pointed out how DELL's strategy of letting the market mature before becoming a player in a given segment has worked for DELL. Imagine now if DELL uses the same marketing know how WITH "first out of the gate" new products like this wireless portable computer!! Very exciting proposition. I believe DELL branded innovation began early in the year with the first 64MB DDR video card. More is certainly to come.
And now for the bad news story. mepci speaks often of DELL's ESOP diluting investment value. The following story exemplifies what he has been saying
At Dell, Taking Options Over Cash Is No-Brainer: Graef Crystal
San Diego, June 26 (Bloomberg) -- There's good news and bad news out of Dell Computer Corp.
The good news is that the founder and chief executive, Michael S. Dell, whose last reported shareholdings were worth $16.3 billion as of June 14, finally took a break from accepting outrageously large stock options from his board. The bad news is the personal computer maker continues to use an unusual, insidious bonus plan and is downplaying its worth.
First the good news. There was a time when Michael Dell took no stock options at all. He took his first baby step in 1995, accepting options on $1.9 million of stock (i.e., the number of shares multiplied by the market price per share on the grant date was $1.9 million).
Dell must have developed an instant affinity to options, because the next year he received a grant on $22 million of stock. And the next year, he received a grant on $82 million of stock. And during the fiscal year ended Jan. 31, 1999, he received two grants on a combined $272 million of stock.
The size of those last two grants was staggering. Michael Dell would earn $221 million from just the last of the grants simply for producing 10 percent annual stock price growth over 10 years -- a level of performance that would send his shareholders into a deep swoon.
In the year ended Jan. 31, 2000, Dell at last decided to ease off on the gas pedal. He received options on stock worth just $36 million and having a present value, by my estimation, of $19.4 million.
Less Performance, Less Pay
I guess you can consider his drop in options a case of less pay for less performance. After racking up annual returns of 381 percent, 201 percent and 302 percent for fiscal 1997, 1998 and 1999, respectively, Dell Computer produced a negative 23 percent return for the year ended Jan. 31, 2000.
You can think of pay-for-performance as a seesaw, with the fulcrum representing average performance. From that perspective, Michael Dell's seesaw has gone up and down with his performance, and that's all to the good. The only problem is that the seesaw's fulcrum is higher than the University of Texas tower in Austin, just down the road from Dell's Round Rock headquarters.
Dell's monster stock options have produced a cornucopia of wealth for him. After hauling away $233 million of gains from exercising stock options last year, he was left sitting on further unexercised gains of $945 million.
Discounted Options
Now for the bad news. Dell Computer for several years has granted discounted stock options to senior executives in lieu of bonus payments. At first blush, you might think the plan is a good way of saving cash and motivating executives to focus on the stock price at the same time. Looks are deceiving, however, because Dell is not making an even swap. And unless you have some experience valuing options, you'd be hard pressed to spot what a great deal executives are getting.
In essence, Dell is telling shareholders that executives can turn in their red cars for blue cars. It just so happens all the red cars are Chevy Cavaliers and all the blue cars are Cadillacs.
To illustrate, on March 24, Dell announced that 11 executive officers would defer all or part of their bonuses in return for a stock option grant, with the strike price of the option set at 80 percent of the then market price. So with a closing price on March 24 of $56.44, the strike price of these special options was $45.15 a share. The term of exercise was 10 years.
Sample Swap
Let's assume here an executive is willing to defer a $500,000 bonus. Putting all the relevant numbers through the Black-Scholes pricing model suggests the present value of a single option share ought to be $31.69. So if you're giving up $500,000 of bonus and if the present value of an option is $31.69 a share, then you should get back an option grant covering 15,780 shares, right? Wrong. At Dell, your option would be for approximately 44,300 shares.
How can this be? Well, Dell determined the number of shares in the option grant, not by dividing by the present value of a single share, but rather by dividing by the amount of the discount between the market price at grant and the strike price, or $11.2875 a share.
With that sort of exchange ratio, all it takes is 20 percent stock appreciation for the executive to earn back the $500,000 bonus that he gave up. Over 10 years, 20 percent appreciation is a mere trifle for a company like Dell Computer.
Intelligence Test
At a stroke, the company has replicated the miracle of the loaves and fishes. The way I see it, Dell Computer ought to use this special options-for-bonuses plan as a selection device. If the executive who is offered the opportunity to trade bonus money for options declines, then you fire him for stupidity.
How can a company be so careless with its shareholders' resources? Unfortunately, it's easy if the effect of your decision is to increase the reported profit to shareholders by not having to pay cash bonuses, while at the same time avoiding any charge to earnings for the inflated options you have just granted. Here we have yet another example of the twilight zone distortions of American accounting.
During its last fiscal year, Dell disclosed it had granted 50 million option shares to its employees and that, by its reckoning, the shares had a present value of $1.1 billion. Just think if the company had paid out that much money in cash to its employees. After translating it into after-tax terms, such a payment would amount to 46 percent of the actual net income Dell reported for the fiscal year ended Jan. 31, 2000.
The numbers may not show up on the income statement immediately but shareholders are waking up to the hidden costs of options in the form of dilution to their shareholdings down the road. Maybe, just maybe, that's why Dell Computer is having increasing difficulty replicating its performance of yore.
Jun/26/2000 13:11 ET
Long Days; Peaceful nights...
Kaka |
