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

To: SouthFloridaGuy who wrote (63616)	4/18/2003 9:48:29 PM
From: GVTucker	Respond to of 77400

Anyway, maybe you only know the big swinging dicks, so they are telling you that it's not used. I only know the peons who actually have to value the damn things. And if those peons come up with the "wrong" value (according to those "big swinging dicks"), then what gets changed, the peons' assumptions or the "big swinging dicks'" value?

To: SouthFloridaGuy who wrote (63616)	4/19/2003 2:00:21 PM
From: Lizzie Tudor	Read Replies (2) \| Respond to of 77400

You clearly haven't read the case. Anytime you have a deal that has multiple instruments encompassed in the "unit" and one of those units is say warrants or options, you need to use Black Scholes. This happens many times when the I-Bankers are trying to price a deal and make all parties happy, I've never taken those HBS classes that are offered to the outside, I only read the syllabus which is supposed to give a sense of the outcome and what will be covered in the class. The impression I got was that some kind of valuation needed to be determined, and black scholes was evaluated in that context. But your original post made it seem like you thought this method was actually used in practice to value pre-IPO companies ("if it is good enough for VCs in round one or two") - well, black scholes ISN'T good enough for round one or two... but don't take my word for it, take a stab at valuing Google with this method and let me know what you come up with. My guess is that applying black sholes to Google (which is the most promising IPO in at least 5 years maybe more) would make Google look like a financial disaster. The "options expenses" on 5-30 million options at whatever risk premium someone can come up with, would probably equate to close to one billion in expenses, or more. Those in the know will ignore any kind of metric like this because the risk premium would likely collapse by the time most of these vest. BTW, originally I was not totally opposed to the concept of options expensing. My view is that options truly only cause dilution, but if somebody wanted to expense options exercised I was not completely opposed to the concept. It was only when I found out the proposal on the table was this nutty Black Scholes method, which obviously was created for short term, publicly traded options. Black Scholes falls apart on any IPO based on the risk premium which is almost like a derivative from my old Calculus classes- and this is so obvious (based on the fact that there are no options traded for IPOs for one thing) - you would think the options expensing crowd would find another approach immediately based on that fact alone. But as far as I know, no alternative options expensing methodologies are on the table, therefore I suspect nothing happens wrt options expensing. The tech lobby has a legal challenge against Black Scholes according to the Mercury News (not sure what they are challenging since this isn't a law) and I suspect any fairly competent legal team can find injustice in this method fairly easily. We haven't even touched on the notion that options granted against an employee's continued stay at the company are hardly worth the same $$ as something traded on the open mkt, black scholes of course makes no distinction even from day one when not one share of a grant is vested. A huge issue right there. If I were in favor of options expensing here I would drop black Scholes and come up with a proposal that made dilution highly visible to shareholders, and forced companies to expense at exercise on actuals. That proposal might have a hope of getting through. Lizzie