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Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Elroy who wrote (170384)	7/24/2002 9:58:43 AM
From: mepci	Read Replies (2) \| Respond to of 176387

Elroy: Consider the following: 1. You own 100M shares(all the outstanding). The book value is $100M. Share price is $1. You grant option to employees to purchase 10M at $1. They exercise it. You issue these 10M shares from authorized shares (first into treasury and then to employees). Here there is no loss to shareholders (if you don't count goodwill). 2. slight variation from above. Stock price went to $10 after the grant of options. Company buys 10M shares from the market. That is $100M cash out from SE. Employees exercise the option. SE gets only $10M. A loss of $90M from SE. A loss of $90M from productive cash from company assets. This is money on which you paid taxes before. You should declare this loss as employee benefit expense. Accounting sets up books for different areas so as to simplify complex transactions. You need to look at a company as two distinct partitions. SE is assets from shareholders and previously taxed retained earnings. Operations are before declaring final after tax profits. Option grants are employee benefits and belong in operations side. Operation $s are before taxes and all transactions in them are subject tax. What management is doing is saying "I am you" to shareholders and taking money directly from SE into their pockets. In addition they are using derivatives to try avoiding any appearance of raiding the SE. As long as derivatives work, the transfer is done without even the knowledge of shareholders. That is how Dell managed the transfer till last year.Now that there is a huge loss on derivatives it is showing up in treasury, but taken directly out of SE. Buying back company stock from market is another ruse management is using to hide these transfers. Actually the taxing issue will be mute, if option grant handling is done as part of employee benefits. The main thing is hiding the transfer of SE to management. Things can be simplified a lot if: 1. Treasury stock is used primarily for retiring outstanding stock. 2. Option grants should be done as a trust under employee benefits and handled somewhat like pension funds. 3. When you grant the options, company should issue equivalent shares into option grant fund, and show the dilution effects. 4. There are ways of protecting SE from this dilution. I won't get into it right now in order to keep discussion focused.