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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Zach E. who wrote (33994)	10/15/1998 3:24:00 PM
From: Knighty Tin	Read Replies (1) \| Respond to of 132070

Zach, The whole structure of this house of cards depends upon a higher stock price. 1. One reason costs are low is that they can pay employees with stock options. And in the past 6 years you would have been crazy not to have taken them in lieu of cash. Not only do options cost nothing, but they give Dell a huge tax advantage if the price of the stock goes above the strike. If you can reduce your employee costs while writing off a non-loss on your tax report, you add steroids to eps. But once the stock heads south, employees start wanting real money and they also start whining about options struck at much higher prices. A double crunch to reported eps. 2. Buying back stock with debt is a mug's game and one which relies on ever higher prices. As long as the stock goes up in price, it is a good deal. But once the stock has serious trouble, you are stuck with all that debt and its interest and nothing to show for it. And what is really funny is that Dell is really not taking much stock out of the markets. Most of the buybacks are to fund the above-mentioned option scams. 3. The interest rate they pay on debt is very low due to the inflated value of the stock. The company can pledge stock and banks accept it. Yes, they give it a haircut, but even after that haircut, it still looks like Don King. Once the stock goes down, rates go up and eps go down. Even if they don't actually pledge the stock, the bankers can see that Dell is worth a gazillion dollars in market valuation. That makes them want to compete on rates, not treat them as a second-rate credit. Basically, it is the success of the stock that has allowed Dell to undercut its competitors. Most think it is the other way around. Don't get me wrong. They do make a good box as efficiently as anyone. But their costs are greatly reduced due to the stock going up in price. Once this bubble pops and the stock declines, eps normalize. MB