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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.

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Analyst Barred For Calling Options A Cost?
Location: BlogsAAO Weblog (Public)    
Posted by: Jack Ciesielski 7/27/2005 12:49 PM
Interesting piece in this morning's NY Times by Gretchen Morgenson.

Analyst Tad Lafountain of Wells Fargo Securities has been put into the "penalty box" by Altera Corporation for his views on the company's use of stock options and share repurchases to offset dilution from them. Here's the drift, according to Gretchen:

Altera's main complaint about Mr. LaFountain's analysis relates to how he views the company's share buybacks... Altera uses such buybacks, as many companies do, to offset the share increases that result when stock options are issued to compensate executives and lower-level employees. In Mr. LaFountain's opinion, those repurchases are not in the shareholders' interests and are the equivalent of using stockholder money to buy shares at high prices and issue them to executives and employees at much lower prices.

For example, from 1999 to 2004, Altera issued 29.5 million shares through option grants at an average price of $6.94 a share. During the same period, Altera bought back 54 million shares at an average price of $23.97 each.

"When Altera has made over the last five years $2.44 a share and its tangible book value goes up only 61 cents, that means 75 percent of the earnings have disappeared," Mr. LaFountain said.

Just another example of why there's a need for a consistent application of accounting standards that take into account the cost of stock compensation. Statement 123R fits the bill. Let's hope companies will realize that behavior like this - or demanding the pull-out of stock compensation from earnings - is no way to build credibility. And that's something they'll want when they don't have it.
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