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.

Strategies & Market Trends : Bob Brinker: Market Savant & Radio Host -- Ignore unavailable to you. Want to Upgrade?

To: Don Lloyd who wrote (16378)	8/2/2002 9:49:38 PM
From: geode00	Respond to of 42834

Aside from my silly error of a company buying back all of its shares and not being able to figure out why there are no other shareholders... thanks for the explanation. I don't know how it will go but one could hope it will be clearer in the future just how much transfer of wealth is going on from shareholders to managers.

To: Don Lloyd who wrote (16378)	8/4/2002 1:46:13 PM
From: Skeeter Bug	Read Replies (2) \| Respond to of 42834

don, the only problem i have with your answer to geode's question is that you didn't answer his question. ;-) geode is correct. IF you have identical companies "a" and "b," in parallel universes ("a" in the option free universe and "b" in the esop universe) and "b" issues employee stock options that go in the money and get exercised - say 1,000,000 shares - and company "a" sells 1,000,000 shares with no employee stock option obligation, company "a" has more capital with which to run its business - the difference in cash is what company "b" ended up forfeiting due to their options program. btw, if the amount of money employees receive from stock options isn't a real cost... why do companies deduct it from their taxes? your assertion there is no difference just isn't correct. there is often a BILLION dollar difference. ------------------------------------ Another question here, the company could have in theory sold those shares at the market price. The company isn't getting as much as it could realize so it's on the losing end of this proposition. It's, in theory, buying a happier employee (yeah, right) but it's still paying. This is a widespread misconception on multiple fronts. First, when a company sells its stock at the market, it is an economic non-event from the POV of the shareholder. The shareholder's proportionate share of the sale proceeds is exactly offset by his dilution of ownership. The shareholder ends up with a smaller angular slice of a larger pie, but ends up with the same amount of filling. The net long term effect, of course, depends on the future stock price trajectory. When a company buys back stock at the market, exactly the reverse occurs, and this is also an economic non-event. However, the long term extent of shareholder dilution is covered up. The exercise proceeds are pure gravy to the company itself and partially offset the economic effect of the dilution of the shareholders. Secondly, since one share certificate is no different than another, new shares can be issued and distributed by a company for either secondary issues or employee stock or option compensation with essentially neither limit nor expense, except for minor administrative costs and existing shareholder dilution. Thus, whereas above, it was shown that even if stock or option grants prevented stock sales at the market, it would be without economic consequence. However, here we see that neither stock or option grants actually prevent anything.