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Strategies & Market Trends : Roger's 1998 Short Picks -- Ignore unavailable to you. Want to Upgrade?

To: purecntry5 who wrote (8374)	5/5/1998 4:33:00 PM
From: phbolton	Respond to of 18691

Stock options are not a free lunch By Gretchen Morgenson forbes.com excerpts Warren Buffett, however, disagrees. In his recent letter to shareholders, he wrote that after Berkshire Hathaway acquires a company, it will often report higher employee compensation costs. Buffett: "Their reported costs will rise after they are bought by Berkshire if the acquiree has been granting options as part of its compensation packages. In these cases, 'earnings' of the acquiree have been overstated because they have followed the standard<but, in our view, dead wrong<accounting practice of ignoring the cost to a business of issuing options." Buffett continued: "When Berkshire acquires an option-issuing company, we promptly substitute a cash compensation plan having an economic value equivalent to that of the previous option plan. The acquiree's true compensation cost is thereby brought out of the closet and charged, as it should be, against earnings." What companies do not like to do is remind shareholders though it is obvious to people like Buffett<that options are highly dilutive. According to Pearl Meyer &Partners, shares allocated for management and employee equity incentive plans at the 200 largest companies last year rose to 13.2% of shares outstanding, up from 6.9% in 1989 (see chart, p. 215). "We used to advise companies that an allocation of 10% was too much dilution," says Steven Hall of Pearl Meyer, "but we blew through that level years ago." Would the market have risen 20.3% in 1996 if the 100 biggest companies had reported earnings gains of only 11%? Doubtful. Based on his group's findings, Smithers figures that the current P/E multiple on the S&P 500 is 35, not the 28 usually shown.