• Jeff Matthews

The Hidden Cost of Being a Shareholder

Give IBM credit.

After years of fiercely resisting stock option expensing by most Silicon Valley companies, IBM steps forward and announces plans to do just that.

The magnitude of the deception by which companies—both high-tech and not—handed out stock options to reward employees without reducing “expenses” for purposes of the almighty “Earnings Per Share” calculation has always been easy to calculate from the footnotes of the offending companies.

The offending companies, however, persisted in looking at things the “pro-forma” way, options excluded, and Wall Street mostly obliged, despite the fact that the whole point of reported earnings is to calculate the amount of income left over for…shareholders.

The cleverest ruse of all may have been perpetrated by Dell, which not only grants stock options up the proverbial wazoo, but then boasts to Wall Street about the massive share buybacks it undertakes as a vote of confidence in its own shares.

The fact is, Dell has to buy back massive amounts of stock simply to offset the extra shares created by option exercises: all that money spent to buy back shares in the marketplace simply means Dell is running in place. The cost of “running in place” now approaches a billion dollars a quarter, for Dell. And it is many billions for other companies, Cisco included, that are also hooked up to the option-grant-intravenous-line.

The notion that employee compensation in the form of stock is somehow different from cash and therefore not reportable on the statement of income leftover for shareholders is, and always has been, a scam; and it only took a major bubble, dozens of bankruptcies, and billions of dollars lost by investors to force a change.

But better late than never.

As a result of IBM’s willingness to come forth and expense the cost of option grants properly, we now learn that IBM’s earnings available to shareholders are 10% lower than previously expected. 2005 earnings estimates are going from the $5.60 a share range to the $5.05 range, using the Bear Stearns numbers.

Think of that 10% this way: it is the hidden cost of being an IBM shareholder.

Jeff Matthews I Am Not Making This Up

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The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. The content herein is intended solely for the entertainment of the reader, and the author.

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