Accounting Observer > Public Blog - Qualcomm Signs On To Cisco's System

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Qualcomm Signs On To Cisco's System

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	5/20/2005 5:19 AM
This, from the San Diego Union-Tribune: another tech company agrees with Cisco's idea to build a market for derivative instruments designed to mimic a value for employee stock options. "It's a great idea that has the potential to bring some integrity to the valuation process," said William Keitel, Qualcomm's chief financial officer. This is important for at least one reason: "integrity" is not a concept that tech firms have brought to the table when discussing stock option compensation. Ever. As for being a "great idea," Coca-Cola's plan to have multiple investment bankers value its stock options as a way around using the Black-Scholes option pricing model was also heralded as a great idea. But don't forget that Coke scuttled the plan. According to accounting folklore, one of the reasons was that the investment bankers intended to estimate the value of the options using - you guessed it - the Black-Scholes option pricing model. Ultimately, the values derived from such hiring such expensive help would be no different than if the accounting staff plopped their estimates into a spreadsheet designed to do such calculations - so Coke scrapped the idea. A couple days ago, Mr. Myron Scholes - that's his name in "Black-Scholes" - tossed some cold water on the Cisco system, questioning the genuineness of a market for these instruments - and wondering that "somewhere along the line the options [underlying the derivatives] would still need to be valued through an established options-pricing model." Just like Coca-Cola discovered. Deja vu all over again. But this time it's different. (Maybe the five most dangerous words in the world.) This time, it's the tech companies are trying to present their version of reality and not some mild-mannered beverage maker. Intel made noises last week that it found the Cisco system "a pretty good idea;" now Qualcomm; and the Union-Tribune article quotes Dell's CFO as saying it's interesting. If the SEC buys off on the approach, the tech companies will bray loud and long that the idea works until they convince people it works - even if it doesn't. Remember, this is the same bunch that once said options couldn't be valued - at all. They said that expensing options was double-counting when in fact it was no-counting. They fooled some of the people all of the time. And they'll do it again.

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