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Technology Stocks : Wind River going up, up, up! -- Ignore unavailable to you. Want to Upgrade?

To: Allen Benn who wrote (3442)	7/21/1998 2:19:00 PM
From: Snowshoe	Read Replies (1) \| Respond to of 10309

Allen, I can't remember how Warren Buffet got into this, but I don't think his opinions on options and buybacks have any relevance here. He says he doesn't invest in technology companies because he "doesn't understand them". His favorite companies are Coca Cola and Dairy Queen, for Pete's sake! More to the point, what is your view on the situation at Microsoft and its tremendous overhang of employee stock options per my previous post? exchange2000.com -Greg

To: Allen Benn who wrote (3442)	7/21/1998 4:01:00 PM
From: Pirah Naman	Read Replies (1) \| Respond to of 10309

Allen: I think that while we have misinterpreted each other, we are in agreement on basically everything. I think that is excellent, and I am delighted that we can turn our attention to the economic issues. I do wish to clarify one point where we are still differing in interpretation. As you said, for the most part it belongs outside the WIND thread, and I would enjoy taking it up with you via the private message function. But on a basic level, the entire thread should see this, I think: So the first part of your statement implies that buybacks are OK if they are done for "legitimate" purposes by an icon like KO, strikes me as innocent. The second part of your statement, "it is just an attempt to slow the rate of dilution", is your assumption that I don't think it is valid. I believe WIND is buying back shares because they have oodles of money and the shares are highly undervalued I certainly did not intend to imply that one reason for buy back is legitimate and the other is not. I suspect it was my use of the word "just" which led to this. Here was the point I was trying to get across: KO, as a huge enterprise, cannot hope to expand their business at the rate WIND should be able to. What should KO do with excess cash - let it pile up in the bank? diversify? (Those are rhetorical, let's not discuss KO on this thread.) On the other hand, ignore for a moment (as I did when I wrote that post) that WIND has a cash pile from the debt and secondary. Simply looking at operations, the money spent on stock purchases for treasury has been running at a high percentage of operating cash flow for the past three years. For a small rapidly growing company to be spending that high a fraction of their income on stock buybacks strikes me as quite curious, just as it would if they were to have a high dividend payout. I think you'll agree that if they did not have the cash from the secondary and debt offerings, this would trigger your curiosity as well. As I commented in an earlier post, WIND has a unique capital structure for a small company! I don't think that repurchasing shares to fight dilution is in any way illegitimate. And as I commented in a previous post, share repurchases do not in themselves grow the business. They do not make the operations as a whole worth more; they simply make each of our pieces bigger. We can say they are fighting dilution, or we can say that the anticipated return from share purchase is greater than that of the alternatives, but when we reflect on how that higher anticipated return can be realized, we are in effect saying the same thing. Let us move on, then, to economic issues. First, I'd appreciate a validation or a correction on this: it would seem to me that the rational holders of the $140M of notes will in all likelihood convert at the $48.50 share price in a few years time. With 100% conversion this would represent an additional 2.9M shares. Second, an off-the-cuff thought on the recent acquisition. It is generally believed that stock is the preferred form of currency when the stock is overvalued. Yet from the standpoint of the acquiree, this would seem to make sense only if looking to cash out in the near future. But a rational acquiree (who should also have an above average sense for the business) might recognize that undervalued stock is likely to offer a more attractive return than other places they might invest the cash, and thus prefer to take the stock. I haven't thought this out to see if it makes sense, or to consider the implications. But given the recent stock acquisition with money sitting in the bank, I thought I'd throw it out for everybody to take some potshots at it. Pirah