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Strategies & Market Trends : Good Investment Theses: VALUATIONS w/ FUNDAMENTAL ANALYSIS -- Ignore unavailable to you. Want to Upgrade?

To: jbn3 who wrote (130)	4/28/1999 2:24:00 AM
From: Chuzzlewit	Read Replies (1) \| Respond to of 160

Evening Bachman, Hypothetically, however, does this not present the case for a positive and judicious use of ESO's--without the dilution we customarily see? I don't thinks so because I think that the cost of the call option must be factored in. And it will always be a cost to the buyer. So even if the ESO is never exercised and options never repriced (unlikely, but since we are dealing with hypotheticals -- possible) the cost will equal the cost of buying the call. Let's try this out. Suppose we have a company that buys a 2 year call for $20. Let's assume an interest rate of 5%. At the end of 2 years the call needs to be worth at least $22.05 for the call to be 'profitable'. So we have a deferred cost of $20.05 plus the striking price of the call option less the striking price of the employee option. I don't see any way around this. This calculus defines the maximum cost because the $20.05 is a sunk cost, and the only cost that would change would be the cost of purchasing the stock on the open market at a cost less than the striking price of the call option. But there is simply no way around that $20.05 cost. It seems to me that the repricing of options by virtually all companies that experience significant drops in stock price (I can't think of a single exception) is pretty strong evidence to me that one of the principal justifications for these instruments (putting shareholders and employees on the same side) is a myth. It seems to me that the fact that companies routinely engage in that sort of thing argues that management views the compensation as an entitlement. I am pleased to have you as an ally in this discussion. Edwarda is a tough opponent, and she is still accusing me of being an eel and of constructing straw-man arguments. She once likened me to the smoked eel in sushi (does that count as an ad hominem?). I'm not sure whether that's better or worse than being a live elver. <VBG> TTFN, CTC