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

To: Stock Farmer who wrote (63676)	4/21/2003 2:43:49 PM
From: Don Lloyd	Read Replies (1) \| Respond to of 77400

John, I know that my arguments often seem like nit-picking to you, and it is no more fun for me to make them than it is for you to read them. The only reason that I persist in making them is that accepting what I see as misconceptions tends to result in their being used as logical bases for seriously erroneous conclusions which look like common sense on the surface. You are arguing that my substitution of "value from shareholders" with "value to employees" is improper because they are not equal. No, I am arguing something different and much stronger. The point is NOT that the 'value from shareholders' is not precisely equal to 'value to employees', but rather that the two values cannot be measured, nor can they be compared, even in theory. This is important because a belief that a benefit to one must imply an equal cost to another can lead to a conclusion that no mutually beneficial exchange is possible. This is often wrong. Forget accounting, and just think about a private company in general. It has some final product revenue and a bunch of real expenses. If the revenue it receives is greater than the total of its expenses, it can stay in business and the positive profit it receives can be either invested in the company, held as cash or distributed to the owner. If the company is able to either reduce or eliminate one of its expenses, its profit will increase and the increase can flow to the same places as the rest of the total profit, OR product prices can be reduced to deal with competition. Depending on the intensity of competition, this may be necessary for the company just to survive. There is no reason that a share of the company profits cannot be given to one of the company suppliers in lieu of cash. This is a reduction in one of the company expenses. The share of company profits given up may be small or large and the reduction in the expense may be small or large. Thus it is possible, but not guaranteed, that some combination of profits and expenses will result in a net benefit for both the company owners and the supplier. While it may seem that dollars are given up and received and that no mutual benefit is possible, this is not necessarily true. For example, the reduction in expense may be necessary for the company to survive against its competition. If the company fails to survive, both the owners and the suppliers lose. Since the supplier may have a marginal cost of production far below its normal product price, it may well benefit by taking a profit share of a surviving company as opposed to shipping and receiving nothing to a failed company. IMPORTANT - No matter how large a share of its profit the company gives up, it cannot reduce a positive profit to a negative one. Not exchanging profit for reduced expense may leave the company out of business, so ending up with any positive net profit from exchanging profits may well be a benefit to the owners. This is a key error in the idea of expensing options. When an actual dollar expense is charged to the company, it can overwhelm an actual profit by subtracting the expense and turning it into a net loss. There is no logical way to make a dilution of ownership turn a profit into a net loss. It can be reduced by up to 100%, but not by more. Regards, Don