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

To: Skeeter Bug who wrote (956)	6/1/1998 8:52:00 PM
From: Bilow	Read Replies (2) \| Respond to of 2578

Hi Skeeter; Seems like I'm being bullish on the DELL bear thread, and bearish on the bull thread. :) I really think this stock is one overpriced hombre that is gonna be writing red ink within 5 years. The problem is how to account for options. I think we agree. If a company gives something to an employee that is worth $1000, then (even if that thing is "free" to the company, like shares and options), the company should take a charge to cost of employees of $1000. This seems pretty clear, but is not required by the current silly accounting rules for reported earnings. But according to FASB #123, companies do have to figure the cost of their (stock option) gifts to employees and compute an adjustment to their net profit/loss accordingly. They publish the number, but almost nobody uses it, cause it isn't the official number. I think it should be. The adjustment is included in the DELL 10K. The value of the options is computed according to the value when they are granted to the employees. At the time they are granted, they have no intrinsic value, and have only time premium. That is why there are no tax consequences to the employee. But Black-Scholes allows a computation of the time premium. That computation is included in the DELL 10K, and causes DELL's earnings to be reduced, but not nearly by as much as the bears would like. Lets make a little change to that Corolla charity thing. Lets suppose a guy donates $1000 (in the form of reduced wages) to a charity (i.e. the company), and recieves a lottery ticket (i.e. a stock option). If he wins the lottery (i.e. the stock goes up a lot), then he gets a new Ford (you don't drive Corollas in Texas). Of course, if he wins the lottery, he has to pay taxes on his winnings. Any difference we have, is on how to value the lottery ticket. I suggest the right value is the value at the time it is given to the employee. If it wins later, so be it, but don't charge some larger (or smaller) amount to income. If a company gave away lottery tickets and one of the employees won $130MM, would that mean that the company should take a charge for that amount? Suppose you did charge stock options to income. What are you going to do when the stock goes down? Take a big windfall profit? Nah, just try and figure out a cost at the time it is given, and charge it to that accounting period. That is the way of FASB 123, and that is the way I think it ought to be done. That stuff where the company buys back shares is just an old magician's trick. Audience sees two things going on at the same time and concludes that they are related. Take a look at MSFT. Their CFO said that the stock was too high, and they quit buying it. But they are still getting options exercised, and lots of em. Bill Gates is an employee of MSFT. He owns 25% of the stock or so. The stock went up a 10 sticks. Does that mean MSFT lost billions of dollar? Does MSFT earn it back when their stock goes back down? Answer these questions if you want to say that FASB 123 is not the correct way to calculate the value of stock options and stock grants. My answer is that MSFT doesn't earn or lose money based on how its stock performs. Thus you have to expense the value of the stocks and options given Bill at the time they were given, not 10 years later. Trying to pin DELL's fiscal 1998 earnings with the current value of employee stock options given 5 years ago makes no accounting sense at all. The guys who got the options became investors, and what the investors make just doesn't go into the company profit and loss. If a MSFT employee trades the company stock, his losses do not show up on the MSFT income statement as reductions to payroll. And the increase and decrease in value of options granted employees, just like the increase and decrease in value of stock granted directors and employees, are not expenses of the company. Part of the confusion is that because of tax rules, the grants are options instead of stock. If it was stock, it would be silly to suggest that when the stock went up in price the company should take a hit. After all, a lot of the stock in these companies is owned by employees. Michael Dell, for instance. It just doesn't make sense to charge the company for Mike getting rich off the stock or the stock options. (Much though we may envy it. :) Instead, you have to value things at the time they are given away, and that is what I am suggesting. On the other hand, I agree with you completely that the fair market value at the time of grant shouuld be included as an expense when a company gives away stock and stock options. But not the fair market value 5 years later, only the fair market value at the time of grant. That is how the FASB 123 works, and I agree it. If you have an alternative accounting scheme, lets here it. -- Carl