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Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: PAL who wrote (102971)	2/19/1999 12:31:00 PM
From: Knighty Tin	Read Replies (1) \| Respond to of 176387

PAL, it's all in the 10Ks. Read them yourself. I would say that maximizing shareholder value is too big a temptation for ethically challenged folks at corporations. Building long term value at the co. seems smarter to me. MB

To: PAL who wrote (102971)	2/19/1999 2:33:00 PM
From: Chuzzlewit	Read Replies (2) \| Respond to of 176387

PAL, I have thought extensively about these issues for some time. Let me start by separating the two issues, because they are really distinct and do not depend on one another. 1. Stock buybacks. MB has suggested that this is dangerous because it results in a decrease in income (because of foregone interest). That argument is clearly specious because it implicitly assumes that simply increasing earnings leads to higher shareholder value. Financial theory teaches that shareholder value increases when returns exceed the average cost of capital. Any returns below that value decrease shareholder value. Furthermore, financial analysis teaches that cash that cannot be invested profitably ought to be returned to the shareholders in the form of dividends. This is called residual dividend policy. Since share buyback are really tax-advantaged dividends, I submit that this is exactly what Dell is doing. MB has also suggested that it is dangerous to repurchase shares when the price of the stock is high, but prudent to do so when the price is low. I have two objections to this view: First there are ethical issues, because in essence it pits the corporation against the shareholder in the stock market. Because of inside knowledge, the company is in an advantaged position to trade its shares over investors. Thus, this kind of activity is really intended to take advantage of less knowledgeable investors. Secondly, it sidesteps the purpose of equity capital, which is basically to provide sufficient resources for the corporation operate optimally, not to generate trading profits. That is the rationale behind the absence of trading profits and losses in a company's stock appearing on the income statement. Second, the practical issue of valuation arises. This is a very thorny, complicated issue. If one were to say that it is a mistake for Dell to buy back shares at these prices, then it is equally true that it is a mistake for investors to buy shares at these prices. Who, then tells us the proper price of a company besides the market -- Michael Burke? Besides, Dell uses the sale of put options to finance the repurchase of shares. And when the shares of Dell were low, as they were two years ago, was it a mistake, in retrospect for Dell to have repurchased its shares or does this become a brilliant move thanks to hindsight? 2. Stock options. On this issue I agree almost entirely with Michael Burke (gasp!). I have been saying for some time that it is a shareholder rip off because it shifts the costs of executive salaries from the company to the shareholders. Now it is true that the cost of these instruments have been softened by the judicious use of put options, nevertheless they are underhanded. I believe that there are two motivations behind employee stock options: 1. To hide from shareholders just how much the company pays to top executives; and 2. To prevent those payments from showing up on the income statement. In other words, employee stock options are intended to fool shareholders, and they do so by evading a proper accounting. The rules regarding the accounting for executive stock options need to be revised to adequately protect shareholders. Sorry for writing at such length, but these are important issues that need to be understood by all shareholders.