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Besides a potential big ego on Jack, I do think that he has a point not to accelerate. GAAP numbers are just a perception to the street and has an impact on short term stock price. However the long term stock value is not affected when he accelerate or not. The earning power and cash on MXIM account is still the same.
An accounting question: we all know that the current way of expensing stock option is not very accurate or reasonable. Does company pay income tax according to GAAP earning? If so, over expensing for stock option may save company some tax, thus create better cash position.
I think company should significantly reduce giving away stock options, and stop stock buyback. I would rather give employees more cash bonus according to their performance. Stock option is not a fair way to compensate employee. FASB should change their rule to force company expense stock buyback.
It does not make sense to me for a company to buy back stock and not taking it as expense. The earning should be a measure of how much money a company can make. The profit should either go to company's book or goes to shareholder as dividend. If you buy back shares, the money is gone. It's spent. It should be counted as expense because that is the only way the company can take to limit inflation of total share numbers.
For example, it company X makes 1 dollar per share a quarter. It uses that 1 dollar earning to buy back shares, and gives the same amount of stock or stock option to its employee. The net result is that the total share amount remain the same. Because all earnings of 1 dollar is spent to buy back shares, the company always have the same amount of cash in its book. If I am a sharehold who holds 1% of the company, I will keep being a 1% shareholder for the same company. So the earning power of the company to me is ZERO. To me the company earning should be zero instead of $1 per quarter.
Besides the idea of expensing stock buy back, the way of giving/expensing stock option should be changed. Option should be considered compensation to employee from shareholder. By giving stock option to employee, regular shareholders are taking the hit of dilution, thus shareholders should be compensated. The expense on stock option must be real and distribute that expense to shareholders. For example, let's assume Maxim spend $20M this quarter for stock option. Maxim should take this $20M out of its book and distribute it to all shareholders. The cash a shareholder get should offset the loss of dilution effect.
By adopting these two rules (expense stock buy back and distribute option expense to shareholders), the earning number will reflect the real earning power of a company. If a company earns $1 in this quarter, it will have $1 more on its book.
Companies indeed pay less tax under GAAP.
In Maxim's case, they paid $16.8 million less tax under GAAP because of stock based compensation, in Q4'06.
Net income (GAAP) was $34.5 million lower than non-GAAP in Q4'06. Without the tax savings, it was $51.3 million lower.
But more and more analysts consider GAAP earnings now. The next report in October will be the first one, where Q1'07 will be compared to Q1'06 - and both will include stock options expensing.
The comparisons to the previous year will be valid.
Wow, that's a tax loophole that Maxim is taking advantage of. Sooner or later IRS will realize that.
It's nice to know that Q1'07 will be compared to Q1'06 in an apple to apple way.
I do agree that stock option should be expensed, but the current stock option expense accounting method is not mature or fair. It was born to political pressure without enough rational thinking. It creates double hit to shareholder: shareholder take the first hit on share dilution, and shareholder take the second hit on lower GAAP earning. The only console to shareholder is that the book value should grow faster than GAAP earning due to virtual option expense. However if company use cash to buy back shares, it leaves nothing to shareholder.
For long term shareholder the fundamental of the company is still strong. The P/S value is under 5, which is very low historically for this cash cow. The business is much stronger than itself 5 years ago, and there is still plenty of room for growth. I can accept a little bit lower profit margin as long as the company can get back to its track of outgrowing its competitors.
"...It does not make sense to me for a company to buy back stock and not taking it as expense. The earning should be a measure of how much money a company can make. The profit should either go to company's book or goes to shareholder as dividend. If you buy back shares, the money is gone. It's spent. It should be counted as expense because that is the only way the company can take to limit inflation of total share numbers...."
If a company spends $100M of its excess cash, there is no real difference between it being distributed as cash dividends or spent to buy back stock, reducing share count. If all of the dividends received by existing shareholders were re-invested in stock the result would be equivalent to buying back stock. If stock is bought back, the shareholders can each sell enough stock to extract the equivalent of the cash dividend. It is then only necessary to undertake a meaningless fractional forward or reverse stock split to restore the share count.
Therefore, expensing stock buybacks woukd be equivalent to expensing cash dividends.
However, The real problem has always been that stock buybacks not only appear to be free, but are applauded by Wall Street, no matter the price and valuation.
When a company uses either stock or options to increase the outstanding share count, it is diverting future dividends from existing shareholders. When it buys back stock, it is also diverting future dividends by spending the cash that would otherwise have been distributed as dividends.
This diversion of future dividends is what should have been accounted for, rather than proceeding into the insanity of accounting for option grants, in addition to the existing mistake of expensing stock grants.
Expenses relate to an actual business and its viability and dividends relate to the returns to shareholders. Mixing up the two categories is the worst of all worlds.