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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (47573)	1/30/2001 7:50:32 PM
From: Adam Nash	Read Replies (1) \| Respond to of 77400

I believe if options have any real value, it should be as an incentive. But there should be a greater recognition in the investment community that they are a form of compensation. There is no one in the investment community that thinks otherwise. The question is where to account for equity issuance. It isn't a simple question. In terms of value as a tax shield, or other financial machinations, I don't think these flows deserve a premium multiple. They look like extraordinary gains to me--strengthening a company's balance sheet, but not a predictable annuity. The predictability of a cash flow should be incorporated into the discount rate. However, it turns out that if you believe that share price, long term, is highly correlated to free cash flow, then the discount rate used on the tax shields from stock option exercises should be the same as the one for operations! Thus, mathematically, much ado about nothing. If anything, from the perspective of one trying to discount future "real" operating cash flows, the options morass is just a big confusing mess. Makes it harder to assess the real earning power of an enterprise, both because expenses are skewed, and the share count is skewed. Confusion deserves a lower multiple in my book. My point was merely that "multiples" are just a short-hand simplification of the real math, which is to discount the future cash flow back to the present. A lower multiple thus means a higher discount rate. The problem with this is that I am not sure that the discount rate for these tax-shields would be significantly different that the shield from operations. To paraphrase Buffett, if options aren't a form of compensation, what are they? And if compensation isn't an expense, what is it? As smart as Buffett is, he really loves to oversimplify in these remarks. No one doubts that options are compensation. And they ARE recognized as compensation, but at the time of EXERCISE, not at the time of ISSUANCE. And to be honest, I haven't heard a convincing argument, except "opportunity cost", to expense them at issuance. I discount the argument of "opportunity cost", because in accounting, it would be a DISASTER if companies had to suddenly account for all missed opportunities in the current year. Impossible, in fact. And if an expense shouldn't count against discounted present value, where should it go? This is your addition, and it is pretty funny. But see above and I think you'll see where I am coming from.