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Cisco's System

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	5/13/2005 5:49 AM
Plenty of press reports in the last couple days on Cisco's plan to come up with values for options granted to employees. (Here's one at the Financial Times - subscription required.) And the Wall Street Journal also reported that Intel is favorably disposed towards the Cisco plan and that the Semiconductor Industry Association is "in 100% agreement" with it. At the same time, Cisco has discussed very few particulars about their plan. Drop the word "options" into the search box on their website and 21,700 hits come up. I couldn't find the one that related to this topic. They may be keeping things close to the vest while seeking the SEC's blessing. What we do know, from press reports, is that they want to create a limited market among institutional investors for derivative instruments on the options they grant to employees: they'd be purchased once at issuance by the institutions and held over the term, similar to the conditions imposed on the employees who receive. On the face of it, it's not an entirely bad idea: you'd like to use market prices for establishing fair values whenever possible. But there are bad odors surrounding this idea too. First of all, the value being set in this market is not the value of the options: it's a value for a instrument based on the options' value. The options themselves are not being traded, but an option on an option. Maybe the value of an option could be imputed from the price of the derivative, but it might not necessarily be the same price as shown for the derivative. Second, if it's a limited market of institutional investors, it won't be deep or visible. Why not pick your chummiest VC investors to take part in the bidding process? A closed, opaque market such as what's being proposed here would essentially allow you to pick and choose the value you want for the options. (What on earth might that value be close to?) In the hoopla over the Cisco proposal, one issue seems to have been overlooked: this should only affect the options offered prospectively. It's hard to see how this plan could be contorted into a way to revalue the mass of overhanging options already granted in the past that will still have to be streamed into earnings beginning August 1. The great options war isn't over yet, it seems; all of these tech types are being dragged, kicking and screaming, into the mid-1990's. If you want more evidence - and kicking and screaming - see www.expensingisbadaccounting.com. It's another late PR entry for the hearts and minds of Congress.

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