Hype Over Options Expenses On The Way

from the is-this-really-a-big-deal? dept

We've discussed in the past how the whole debate over expensing options is really much ado about nothing. It's purely an accounting issue, that has almost no real impact on actual cash. Yet, that doesn't make for an interesting news story, and Marketwatch has a story about how the tech world is "bracing" for the impact of having to expense options. Of course, while the article starts out with some scary sounding numbers concerning a few companies' income statements, the rest of the article makes it pretty clear that the impact should be minimal -- as it still doesn't change anything real. It doesn't change how much cash a company has, unless that company decides to go out and buy back shares to prevent dilution (as some firms are doing). However, any serious investor has already taken into account the new rules, and it's unlikely to cause much concern. There will likely be some headlines about a few companies who will go from a profit to a loss over this, but it's all on paper. It remains a story for the press to make a big deal out of, but which should have little real impact on most companies.

Reader Comments (rss)

(Flattened / Threaded)

  1. identicon
    Andrew Strasser, Jan 16th, 2006 @ 5:22am

    It cuts down on laundering.

    That's the real basis behind more inspection on the books in this area as it cuts down on. Cleaning money through your organization. What is petty cash and a cash job..

    reply to this | link to this | view in thread ]

  2. identicon
    Director Mitch, Jan 16th, 2006 @ 8:08am

    You'r Looking Only at the Shareholders

    I have to diagree with you on this one about this not being a "big deal". I guess it depends on who you are talking about.
    Surveys are estimating that some 60% of companies are cutting back on options, and those that are cutting back, about half are cutting options only to the lower ranks (i.e. not everyone, just the little guy). Of course nothing is changing for the upper ranks, so all this rule did was take away a perk from the rank-and-file.
    So no big deal? If you are an upper manager, I guess so.

    reply to this | link to this | view in thread ]

  3. icon
    Mike (profile), Jan 16th, 2006 @ 9:11am

    Re: You'r Looking Only at the Shareholders

    Mitch, yes, you're right. I should clarify. By not a big deal, I only meant in the financial sense. The fact that companies are changing how they create incentives for employees is a big deal -- but the financial landscape doesn't really change directly from it. The indirect issues from fewer options may be a different story however.

    reply to this | link to this | view in thread ]

  4. identicon
    TechTrader, Jan 17th, 2006 @ 5:33pm

    Options Expensing

    Actually Mike, the "optics" of option expensing does matter. If you assume that individual/retail investors are important in a high valuation market, then this sudden change could have a big impact. Why? Because even though institutions have already incorporated this expense into their projections, individual investors have largely not done so. Why? Because this issue is far too complex for the general investing public. So, if you take the view that the public is usually The Greater Fool in a market where we have large, established companies trading at 50x cash flow and 8x revenues, then spooking your exit strategy (the retail investor) could be disastrous. If the retail investor decides to vigorously sell and removes liquidity from tech stocks, then you'll see the institutionals unwind as well...and that will not be pretty.

    reply to this | link to this | view in thread ]

  5. icon
    Mike (profile), Jan 17th, 2006 @ 6:07pm

    Re: Options Expensing

    Betting on the market being extra stupid isn't necessarily a wise bet.

    If anything, it seems that the the retail investors simply follow the analysts these days, and the analysts should know better. Just look at how Intel/Yahoo stocks moved after their calls today. It wasn't about a bad quarter, but about analysts worries... leading to lots of people selling. It's the difference in real results from analyst expectations that were the problem -- and you can see how people follow analysts in the resulting panic.

    reply to this | link to this | view in thread ]

  6. identicon
    TechTrader, Jan 18th, 2006 @ 6:45pm

    Re: Options Expensing

    "Betting on the market being extra stupid isn't necessarily a wise bet."

    Oh, I don't know, I make a lot of money doing that. See my blog for when I started calling out GOOG.

    reply to this | link to this | view in thread ]

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