Cisco Tosses Potential Options Grenade Into Option Expensing Debate

from the sneaky,-sneaky dept

Ever since the debate over expensing options began, it seemed like a silly debate. The price of expensed options would be essentially made up, and not particularly accurate. It wouldn’t make for a difference in cash position. Most importantly, though, most professional investors would already make adjustments for the extra expense — so it would only serve to shift things around on financial documents. At the same time, just like with everything on Wall Street, when regulation close off one popular thing, the financial wizards come up with some other mechanism for doing, essentially, what they were doing before (or maybe something even sneakier). So, now that it looks like companies really will be forced to expense options, is it that surprising that a company like Cisco is already pushing a plan that would let them expense options at a much lower rate? The plan is pretty simple, but ingenious at the same time. The problem with expensing options is that there’s really no good model to price them accurately. Everyone points to Black-Scholes, but that doesn’t really make sense for many growing companies. So, Cisco’s plan, essentially, is to create a real market place for derivatives based on its options, allowing professional investors to trade them — on the (very likely) assumption that they’ll price them well below what Black-Scholes would. This way, Cisco can claim the real market price of the options is much lower, and take a much smaller expense hit on its income statement. If the SEC agrees that this is a legitimate way of expensing options, expect just about every tech company to start pushing derivatives of this nature.

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