Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: Peter J Hudson who wrote (118955)	5/19/2002 10:21:39 AM
From: kech	Read Replies (1) \| Respond to of 152472

Pete - Good to focus on the denominator or eps, or number of shares issued, which is already in the denominator and reported as diluted number of shares, vs the "cost" of options which be an attempt to charge for the cost of these options in addition to the dilution in the numerator of eps. So far, most of the effects of options is tracked through diluted eps. On the latter point, There is no direct cost to the company, if you want to compute the indirect or opportunity cost, it is the difference between the strike price and market price at the time the shares are granted, pledged as compensation. Any subsequent price appreciation in those shares is not a cost to the company, anymore than appreciation in shares they sold at IPO. One point this raises, is that even this cost is only fairly clear for "in the money" options, and could only be charged once the employee can exercise the option. One problem is that firms want employees to hold these options and often put limitations on the options, i.e. employees must hold for x number of years. As recent experience points out, there might have been a charge for options which, if stock price falls, employees would never exercise. In much the same way as SEC gets bent out of shape about claiming revenues for non-cash benefits etc, they should also not accept costs charged which subsequently are not costs and would then raise income! They don't like things which give management the ability to fudge net income, why should they think this is a good idea.

To: Peter J Hudson who wrote (118955)	5/19/2002 11:46:38 AM
From: Stock Farmer	Read Replies (4) \| Respond to of 152472

Hi Pete, strange things relieve you. I never said that the COMPANY incurs a cost. I said that SHAREHOLDERS incur the cost. You seem fixated, like others, on the fact that since the Company doesn't incur the cost that it doesn't exist. A fool and his money is soon parted. This is funny: "There is NO DEBT, the company GRANTS the employee the right to ... blah blah blah. Semantics are such simple things. There is no debt by the company in the strict sense of the company owes no money to the employee, pays no interest and records no liability on the asset sheet. Sure. But promising someone to pay them money in the future is a debt. And stock options are many things, amongst which the promise of future money of indeterminate amount ranks fairly highly. Employee gets paid an unknown amount, and someone else pays and the company arranges it so that it doesn't appear on the books. Who pays whom is a technicality. Something like the wave particle duality problem in physics. Most minds on the planet are bent out of shape trying to contemplate this phenomenon. A few are capable of grasping it for what it is and navigating the consequences effectively. The fact that the board of directors agrees the size of the pool in advance is hardly meaningful. As if because you get a pre-approved mortgage from the bank, then when you sign the paperwork for the real amount it isn't a debt? LOL. Try again. And the instrument itself is a "grant", which legitimizes the perspective that there is no debt of wage involved. Much the same way as shutting one's eyes legitimizes the perspective that there's nothing to be afraid of. It's all in how we choose to look at things. But there is some truth to what you claim. There is no direct cost to the company. Absolutely correct. You may actually be relieved that me and my voodoo accounting agrees with you. Using option valuation that has increased over a multi year period and calling it a cost to the company in the year and amount of exercise,is ridiculous. Yes, it's not a cost to the company. But who cares? Whether or not it's a cost to the company is about as important in the grand scheme of things as half a bridge. The purpose of shareholding is so that the company's value can accrue to the shareholders benefit. Stock options are a cost that is carried by shareholders. Are you trying to tell me it doesn't make sense to count the cost against the benefit? Just because the cost doesn't accrue to the company doesn't mean that it doesn't accrue to the shareholders. I am explaining the cost to pocket A (shareholder) in terms of the actions of Pocket B (company) while cash from Pocket A goes to pay Pocket C (employee). In this regard certainly pocket B has no debt, and incurs no cost. So your narrowed-to-a-point point of view is perfectly correct. And just conveniently leaves out the fact that Pocket A gets emptied while Pocket C gets filled. And naively assumes that since no money passes through Pocket B that Pocket B has nothing to do with it. Which may indeed be technically correct. However, speaking merely from the slightly broader point of view of a shareholder, I actually don't give a rats ass whether the company incurs costs on my behalf or whether I incur them myself because of what the company does. In the end it's the same thing. If you feel obliged to make such an important distinction, feel free. There are millions out there who have a vague notion that stock options cost something, and have something to do with dilution of EPS. But have never bothered to figure out how it all relates to earnings and share price and so on. And are absolutely certain that it has nothing to do with the company. But also haven't figured out what it means to shareholders. And many amongst them prefer to remain ignorant than think through something complex. If you think my accounting is nutty, try the following exercise. Pretend for a moment that you are the sole shareholder of Qualcomm. Work yourself through this person's finances by following only one rule: when the company issues a share, this person buys it at "market price". Now, our make believe shareholder doesn't actually get any wealthier when the market bids up the price of shares (he still owns the same asset, Qualcomm). He also doesn't get any poorer either when the stock price plummets. Mq will appreciate this idea. His wealth only changes when Qualcomm's assets actually increase or decrease. Now, if Qualcomm issues a share and he buys it directly from the company, he isn't any richer or poorer. Money flowed out of his Cash pocket and becomes a Cash asset of the company. Which he owns all of. He loses some dollars of cash, gets the same dollars of asset. And thus is no richer or poorer. If however Qualcomm issues a share to an insider for $1.00, and our Shareholder then buys it from the employee for the market price of $32.00 then the employee ends up with $31. Our Shareholder is poorer by $32 but richer by the $1 that the company gets. So our Shareholder is poorer by $31. Maybe in parallel the company increased its assets by $35 (not including what our Shareholder has contributed in cash). Or maybe the increase was $27. But it does no good for him to sit there counting himself wealthier by $27 or $35, when in actual fact in the sum of all transactions he is merely wealthier in the amount of $4, plus or minus. He can argue that his leakage of wealth is offset by the wealth that the company is generating. And so he should. But to make such a claim he would be well served to merely ask "by how much". And determining whether it is plus or minus. Which is what I am doing. Particularly if our Shareholder is contemplating purchase of Qualcomm for 25 Billion dollars. He might want to know how long it will be before the company accumulates the other twenty someodd billions. If along the way he is also expected to contribute another twenty someodd billions towards the company's generous employee enrichment program, then he might want to think twice about how much he thinks is a fair price!!! Warren Buffett calls this "thinking like an owner". I suggest you do the same before labelling such "accounting" as Voodoo. It may be completely foreign to you. But just because you don't understand something doesn't make it incorrect. John

To: Peter J Hudson who wrote (118955)	5/19/2002 11:55:01 AM
From: Art Bechhoefer	Respond to of 152472

Peter, thanks for emphasizing that options are not expenses to the firm when the options are issued. The only problem with options is that people who don't read the notes to the financial statement may not realize that options can become both expenses to the firm and dilutive to shareholders. Options can and should be considered an incentive, but not when the firm allows the exercise price to be lowered just because the firm or the market isn't doing as well as previously anticipated. The reason that options are popular is due to the tax system. The option buyer anticipates a capital gain sometime in the future, and will exercise the option as a way of getting what ammounts to a salary bonus at the lower capital gain tax rate. The corporation, on the other hand, gains from paying a portion of the "salary" or "bonus" or whatever you want to call it at some time in the future, rather than at present. In my view, while I accept options as a useful tool in the present system, I would prefer to see corporate taxes dropped to low levels, such as 5 percent, and capital gains taxed as ordinary income, adjusted for inflation. This would eliminate abuses and be fairer than the present system. The only problem is that it would be politically unacceptable. One way of handling options under the present system would be to require corporations to expense a percent of the cost (such as 50%?) once the stock price reached 90 percent of the exercise price. At that point, it could be argued that the corporation may have an expense in the near future, and so the option expense would be similar to any "set aside" (e.g., sums set aside for judgments, potential liabilities, etc.) that is now routinely accepted in the industry. This would be a better way of treating options than the way Standard & Poors wants to do it, regardless of how close the options are to being exercised. Incidentally, dropping corporate taxes would also in effect drop the government subsidy on corporate investment, forcing corporations to take more responsibility for lousy investment decisions, including takeovers at ridiculously high prices, and other types of reckless spending that contributed to the dot.com bubble. Art