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To: Skeeter Bug who wrote (16455)	8/9/2002 8:59:02 PM
From: Don Lloyd	Read Replies (2) \| Respond to of 42834

SB, ...opportunity costs are very real. options REQUIRE a company to buy back shares to keep dilution at bay. that money can't be used to build the business. that is the cost. real money, too. no question. in the case of ibm, they would not have to spend billions to offset their options grants... if they didn't have options grants. that is the cost of their options grants. the cost is in terms of dilution OR the cost to offset the dilution if dilution is not acceptable. ibm spends billions to offset their options dilution. real money. Let's break up the process in the middle. The company now has 1 billion and 1000 shares outstanding. For whatever reason, following your example, having more than 1 billion shares is not acceptable. For a $100 per share stock price, it must expend $100,000 to buy back 1000 shares. From the POV of the shareholders, this is an economic non-event. They have exactly the same liquidation value for either selling their shares or for the company itself being liquidated. They do have a larger exposure to future stock risk and a lower exposure to future cash risk. In the case of a stock with another symbol, this would be called a market value investment. With no injury to shareholders, this is not a cost. Even if you must call it a cost, it is a cost of having an arbitrary desire of not wanting more than 1 billion shares, not whatever happened previously. Alternately, the company can execute a reverse split to lower the number of outstanding shares. Still more alternately, the shareholders no longer have to worry about the company doing dumb things with that $100,000. Regards, Don

To: Skeeter Bug who wrote (16455)	8/11/2002 12:59:08 PM
From: Math Junkie	Read Replies (1) \| Respond to of 42834

It sounds like you want to expense stock buy-backs. You wrote, "options REQUIRE a company to buy back shares to keep dilution at bay. " I just want to point out that keeping dilution at bay is not required, it's optional. Secondly, when you talk about the opportunity costs from not having the buy-back funds available to build the company, you're assuming that using the cash for that purpose would have been effective in building the business. But companies have a tendency to time the buy-backs when stock prices and business are weak, so that assumption may not be valid. You could also use the opportunity cost argument against dividends. A stock buy-back has a similar effect to paying a dividend, because if for example a company buys back 1% of its stock, the remaining stock is 1% more valuable than it would have been. For a shareholder, a buy-back is even better than a dividend, because it gives the shareholder the opportunity to defer the tax impact until later (by continuing to hold all his shares), and the opportunity to have it taxed at capital gains rates instead of as ordinary income. The whole point of this discussion is to benefit the shareholders, is it not?