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Red Hat, Inc. Message Board

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  • Bibbicif Bibbicif Jun 5, 2003 11:19 PM Flag

    Good presentation

    Buffett may well have a rule on how many options should be outstanding, but I think even he would laugh at the implication that he owes much, or even a little bit, of his wealth to that rule. It is just a good rule of thumb, not THE key to wealth. If it were that simple, we'd all be rich.

    I am not arguing with you that it would be nicer if RHT had fewer options outstanding. But the number of options is already taken into account in calculating fully diluted EPS. The calculation is in every 10-K and 10-Q. Are there investors who are unaware of what is in public documents? Sure, but they aren't the big players. You seem to think that only you are aware of this deep dark secret, and it is your duty to spread the news. Well, all I can say to that, is.... yawn.

    Had RHT stuck to the 7% rule, there would be 13% fewer shares outstanding, fully diluted. If dollar earnings were unchanged, EPS would be 13% higher. (Of course, if to retain good people you had to pay them more cash in lieu of options, then dollar earnings would be lower, and EPS less than 13% higher.)

    The reason that RHT is selling for $12 rather than $22 is not that its EPS could have been $0.25 higher. That explains less than $2 of the price shortfall. The reason it is not still $22 is because no one wants to pay much of a multiple on RHT's fully diluted EPS, because they think that the earnings of the US outplacement operation will fall off a cliff as soon as the economy returns to what is perceived to be its natural state, a boom or bubble. If fully diluted EPS were a bit higher, the market, given that attitude, would not pay more than a low multiple of those earnings either.

    Your assertion that RHT's stock is being battered down by employees constantly selling shares they get from options is proven wrong by the paucity of such transactions compared to the volume. Anyway, wouldn't that contradict your complaint? If employees exercised lots of options, then there wouldn't be too many outstanding anymore, would there?

    I think you have the kernel of a legitimate argument. Yes, RHT would be selling for a point or two higher if it had issued fewer options. But that is trivial, compared to the $2 to $22 to $12 history the last three years. If it goes back up into the $20's, or heads back down into single digits, this will all happen because of the actual performance of the business and investors' expectations for the future, and not because of any aspect of the option count.

    The fact that the option count so infuriates you only says something about your particular psychological issues, not about anything of great import for RHT stock. I'll be away from the computer for several days, so foam away at your leisure, and I'll respond, if need be, after the weekend.

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