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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: EnricoPalazzo who wrote (50493)	2/24/2002 1:36:53 PM
From: Uncle Frank	Respond to of 54805

>> Pirah I ain't, but here's my take. Your "take" is similar to mine and probably that of most gorilla hunters, which is why I'm looking forward to Pirah's response. He's one of the few bean counters frequenting this board who seems to have an open mind about valuation issues. >> Party 2 is nuts. If stock options had no value, employees wouldn't be taking them. As I see it, Party 2 is not suggesting options have no value, he's contending that they are not dilutive to the degree suggested by Party 1. Based on the formula you suggest, you apparently agree. we should decrease our value of the company by: number of options outstanding (value per share - avg strike price) * 65%* uf

To: EnricoPalazzo who wrote (50493)	2/24/2002 3:22:33 PM
From: Mike Buckley	Read Replies (3) \| Respond to of 54805

Ethan, (Just ask people who bought MSFT & CSCO in the early 1990's if they're upset about the stock grants). It is rather amazing how long-term holding allows us to feel better about most of our investments, huh. :) I think the big concern is on a shorter-term basis, that if Congress changes the laws with regard to treatment of employee-granted stock options investors are concerned that there will be a sell-off in the market. That leads me very nicely to your comment: The fact of the matter is, high tech companies cannot survive without giving out lots of stock options. I disagree with your "fact." :) SAP didn't have any stock options until last year if I remember correctly and it is 29 years old. In the current environment in which American companies are allowed to treat stock options, it's certainly harder to sustain a competitive advantage without issuing them. That's why SAP changed their nearly three-decade policy of not issuing them. However, if Congress changes the law about the required treatment of stock options, I suspect that the companies that have more cash and generate more free cash flow with which to offer higher compensation plans will be at a competitive advantage over those that don't. Also, companies that can remain sufficiently profitable on an earnings-based basis while accounting for the annual ongoing costs of stock options will have a competitive edge over those that don't. But I think it's a huge stretch to say that high-tech companies can't survive unless they offer stock options to their employees. Likewise, dilution per year due to stock options is probably around 3% for these companies. Since the end of 1995, Siebel's average annual dilution has been about 4.5%. For those who want to check my numbers, the 1997 10K shows diluted shares in 1995 as 25,051,000. Multiply that by 16 to adjust for subsequent stock splits and it becomes 400,816,000 shares. The most recent annual earnings report, six years later, records 522,970,000 diluted shares. In that period of time, no public shares have been issued and none of the convertible debt has been converted; all new shares have been the result of employee-exercised stock options. The one item I haven't accounted for is the shares that have been bought back by the company. I have no idea how many shares were bought or when they were bought, but I doubt that accounting for those shares would affect my calculation more than a smidgeon. By the way, the one good result about the declining stock market is that employees have exercised fewer stock options. Companies such as Siebel have the same or slightly fewer diluted shares now than a year ago. --Mike Buckley