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Technology Stocks : How high will Microsoft fly? -- Ignore unavailable to you. Want to Upgrade?

To: John F. Dowd who wrote (71319)	7/18/2002 6:56:16 PM
From: David Howe	Respond to of 74651

<< Actually this qrtr they would be restating earnings upward for all the unexercised options that they had expensed unnecessarily >> That's a good point. And, did you hear on the call that they might put back into earnings the money they set aside for the legal settlement? I didn't catch the full context of this, but it sounds like they no longer think they will pay this. They must have been referencing some specific portion of the legal costs set aside a few quarters ago. Dave

To: John F. Dowd who wrote (71319)	7/18/2002 7:25:03 PM
From: jonkai	Respond to of 74651

Actually this qrtr they would be restating earnings upward for all the unexercised options that they had expensed unnecessarily.JFD you seem to be confused..... completely confused...... buying back actual shares, does not mean they got rid of any options, they didn't buy back any options.... those new options are as dilutive as any other options..... buying back shares however does lower share count, and increases earnings... if they buy enough back...... they came up short by 65 million new shares...... but they did lower the total amount of dilution, or your Earnings would have been even worse.... so those buy backs do show up in earnings..... but you bring up an interesting thing that you all have not thought of, MSFT "made" street estimates by 1. having another surprise one time charge.... and 2. by buying back twice as many outstanding shares as they normally do.... otherwise they would have missed earnings.....(not to mention hiding their biggest expense) interesting..... and their current cash minus current liabilities also went down... so obviously the SEC hasn't taken every tool away from MSFT to pump up earnings more than what their business is really performing.....

To: John F. Dowd who wrote (71319)	7/19/2002 12:26:54 AM
From: technologiste	Read Replies (3) \| Respond to of 74651

Actually, you've inadvertently highlighted another problem with requiring companies to expense employee stock options. Under current accounting rules, a company cannot restate option expenses no matter what the subsequent performance of the stock. In other words, no matter how much the expensed options rise or decline in imputed value, once expensed, the charge is permanent. It's not hard to imagine what the effect on the market would have been in recent years, had this expensing rule been in effect. Numerous companies, many in high tech, would have had to "erase", or more accurately, not be allowed to report, billions in profits because they had issued stock option grants, even though those grants quickly turned out to be virtually worthless. It is hard to see how requiring companies to expense stock options in recent years would would have made a positive difference in today's market for today's investor. I think it's easy to conclude that this rule would have worsened an already difficult economic and market situation. All of which achieves exactly the opposite goal of what the rule's proponents are arguing. At heart, requiring companies to expense stock options is based on a misguided argument. Expensing employee stock options would not have prevented the recent financial scandals. The argument that options create incentives for executives to deliver good results is true. But executives should deliver good numbers. That is their job. And good numbers are the correct measure of their job performance, I don't mean good numbers for just a single quarter, but good numbers delivered consistently (an occasional bad quarter or two is to be expected) over a few years. Not long ago American companies were criticized for being too focused on quarterly results while Japanese companies could easily weather mediocre quarters because they had a "long-term" focus. Lousy results now would be rewarded with great results in the "long term". Well the "long term" never arrived in Japan, and mediocre quarters become awful than disastrous quarters for many companies. What seemed an admirable, principled approach toward corporate management (short term sacrifice for long term gain), turned out to be a weak excuse to avoid reforming outdated businesses and practices. So American companies were right to focus on the here and now, in delivering good numbers on a consistent basis. Good results is the drive that makes American companies (probably) the most efficient and the American worker among the most productive in the world. Contrast your typical successful American company with most brand name European companies and the difference is stark. European companies with their clubby, not competitive, executives, with their unmotivated management (few if any stock options for them. France until recently would tax employee option gains at up to 97%. The reason being it's OK to become rich playing soccer or winning the lottery, but becoming rich through a rising stock price is, without argument, immoral). So your typical European company with its entrenched unions, passive shareholders, opaque accounting -- consistently delivers lackluster results. And many have trouble competing outside of Europe as a direct result. But back to the original debate: So, to argue that the pressure on executives to produce good results, directly leads to accounting shenanigans and therefore this is an incentive that must be removed -- is like arguing that college entrance exams should not be graded because it encourages students to cheat. Ungraded college exams would remove the incentive for students to score well, and therefore no students would cheat. It is an effective and simple solution to the problem of student cheating. But it's also an absurd one, if one believes that the finite resources of the best colleges should go to those students who will make the best use of them; and to make the most use of the best colleges not just for the benefit of the student directly, but for the benefit of society as a whole. So what conclusion should we draw from the stock option expensing debate? I maintain that there will always be the temptation for some to pursue worthy objectives by illicit means. But the solution is not to change the objectives and thus eliminate the rule-breaking; the solution is to preserve the objective but to make it harder for anyone to cheat successfully and to have stronger penalties in place for those who don't follow the rules when (not if) they are caught. In short we must reaffirm the rectitude of our goals, just as we must also reaffirm that no worthy goal is ever truly achieved, if we corrupt ourselves in its pursuit.

To: John F. Dowd who wrote (71319)	7/19/2002 12:50:08 AM
From: Exacctnt	Read Replies (2) \| Respond to of 74651

<<<<Actually this qrtr they would be restating earnings upward for all the unexercised options that they had expensed unnecessarily.JFD >>>> I'm not sure that I get your drift. It is my understanding that if MSFT goes to the Black Scholes method of expensing options like it's stated in their footnotes, they would not be able to reverse expenses if the market price drops. According to their 2001 annual report, otpions granted in 1999 were expensed at $20 per granted share over a 5 year period. Options granted in 2000 were expensed at $36.67 per granted share over a 6.2 year period. Options granted in 2001 were expensed at $29.31 per granted share over a 6.4 year period. Those expenses occur even if the grant price is deeply underwater. That's one of the negative results from using Black Scholes. It doesn't allow changes in the original expense calculation made at the time of the grant.