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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: Stock Farmer who wrote (63609)	4/18/2003 5:36:43 AM
From: Don Lloyd	Read Replies (1) \| Respond to of 77400

John, You make a valid point that the word 'dilution' can have different meanings in different contexts, but I doubt that this is an actual major cause of confusion. When 'dilution' is used in the sense of final shareholder value, this is usually a merger situation in which management is trying to convince shareholders to approve new shares for the merger because they will be better off in the end. In the case of employee compensation and stock and option grants, the use of 'dilution' to simply indicate increased share count is appropriate and, as far as I know, universal. But it IS worth asking the question whenever the word 'dilution' is used as to which definition is intended. In a similar vein, the word 'expense' is open to confusion of intended definitions. I would define 'expense' as something that reduces value. Thus an 'expense' to a company is something that tends to reduce the total value of the company. When we consider the existing shareholder, we can talk about a total 'expense' which reduces the value of his holdings. However, this total 'expense' is the result of the interaction of two 'expense factors'. One 'expense factor' is the total value of the company and the other is the percentage share of the total company that an existing shareholder ends up with. When a company creates new shares and issues them to an employee, the total value of the company increases when compared to the results of the cash salary that would otherwise have had to be paid to compensate. The dilution of shareholders, the increase in outstanding shares in this context, is the second 'factor of expense' for the final value of the holdings of existing shareholders. If, and this is a really big if, the management is living up to its fiduciary responsibility to maximize shareholder value, the increase in total company value (from a reduced cash salary requirement) will more than offset the increased share count dilution of existing shareholders, and thus provide them with a net benefit. The ability of a given company to partially substitute stock or options for cash salary AND simultaneously benefit existing shareholders is not a given, but depends on the willingness of employees to accept a limited amount of stock or options in exchange for a sufficiently large amount of forgone cash. Company management can fail in its fiduciary responsibility by not choosing the method and amount of employee compensation that maximizes shareholder value. For some companies this means that stock and option grants cannot be used, but for other companies an appropriate level of such compensation MUST be used. Regards, Don