Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : DELL Bear Thread -- Ignore unavailable to you. Want to Upgrade?

To: Marq Spencer who wrote (915)	5/28/1998 9:41:00 PM
From: Bilow	Read Replies (1) \| Respond to of 2578

Hi Brian Hughes; Yeah that is what fair market value is all about. But the Forbes article has nothing to do with fair market value at the time of grant... The forbes.com web site has a 5/18/98 article that gives earnings forDELL as $498MM being reduced to a loss of $862MM by the "cost of options", but if you read the fine print: Smithers comes up with its figures by adding together the estimated value of options that were exercised during the year and the estimated cost of immunizing the company against future increases in its stock price, which would have the effect of upping its total option costs. The estimated immunization cost covers two factors: the difference between the share price and exercise price on existing options and costs associated with net new option grants. Smithers isn't accounting properly for options. If a company wanted to "immunize" itself against future increases in its stock price, all it has to do is get an agreement with an investment bank to neutralize the options at the time they are granted. The cost of this will be approximately the fair market value of the options, and this will reduce earnings of DELL by pennies per share, as shown in DELL's accounting statement. This is what FASB 123 is all about. The Forbes article is basically about how rich the employees got from stock options, which has nothing to do with how much the options were worth at the time they were granted. You might as well have the company buy back shares to neutralize the wealth that the company's increase in stock price gave to Michael Dell. Hmm. Since M. Dell is an employee, and he has stock, shouldn't the company have to account for the increase in wealth the company's stock gave to Michael Dell? He has a lot of shares.... Clearly this line of argument is nonsense. Once the employee gets the stock, or the option, he is an investor, just like all the other investors, and if his investment increases in value, it is no skin off the nose of DELL or the other shareholders and doesn't need to be "immunized". The dilution happenened when the option was granted, or when Michael Dell kept the high percentage of the company's stock at IPO, not when the copmany stock later went up in value. Smither's technique for immunization also doesn't distinguish between the options granted in the current accounting period and those granted in previous periods. To charge both costs to the current year's profit/loss is an accounting error. The FASB 123 technique, which I would suggest is the correct one, is mentioned, but Forbes isn't using it. The article is (bear) hype. Incidentally, the New York Times had a good article on the subject, but it was more than a year ago, so I couldn't find it on their 365-day web site. Anyway, I posted the DELL company data: exchange2000.com Which says they granted something 6.1MM options last (fiscal) year worth an average of $16 each, total value of $100MM. These numbers seem reasonable to me. Do you doubt the number granted, or the value of each? My guess is that DELL had an average price of $40 per share (after splits) during fiscal 1998, so the total cost to "immunize" those 6.1MM options, (though there is no reason to do so,) would be about 6.1MM X $40 = $244MM. This is 6x less than what the Forbes article suggests, I believe because Smithers looked at the cost of "immunizing" against all those stock options previously granted. Hey! Those horses were already out of the barn. The dilution already happened. Why put it into this fiscal year's profit/loss statement? It just doesn't go there. Lets see what effect options have on DELL's real growth rate. That is, the bulls believe that DELL will increase its earnings at, say, 35% per year for the next millenium or two. What effect does the dilution have on that earnings growth rate? To make this simpler, lets make the worst case assumption that every option granted is eventually in the money and is eventually exercised. This is impossible cause employees quit, and never vest them. Also the stock price goes down and the options end up out of the money. But anyway, DELL had something like 1000MM shares last year. (Post split. I may be off by a factor of 2 somewhere in here, but it just doesn't matter.) DELL granted 16MM options. Thus they increased the float by at most 1.6%. Thus their true (long term) growth rate is not 35%, but is instead 32.9%. (Actually DELL's 1-year growth rate is much, much larger than 35%, both in sales per share and in earnings per share.) I think it is obvious that in the current atmosphere of assuming massive (and unsustainable) growth rates the effect of options is quite negligible. The death of equities will be due to simple earnings problems, not to over-issuage of stock options. The fact that DELL is severely overpriced is what keeps options from being a serious problem. Notice that companies like GM, C, or F don't issue much in the way of stock options to employees. -- Carl