主题：【文摘】OPTION EXPENSING，CISCO的对策 -- 西风陶陶

Cisco Plans Security to Set Market Price for Options (Update3)

May 11 (Bloomberg) -- Cisco Systems Inc., after failing to stop a rule forcing companies to expense employee stock options, is seeking regulatory approval to sell a new derivative that may soften the blow to earnings.

The San Jose, California-based company said it's requesting Securities and Exchange Commission clearance for the security, developed to put a market price on employee options. Cisco is betting that the price investors would pay for the derivatives will show its options are worth less than valuation standards such as the Black-Scholes model suggest.

``As long as it's not done in a way that turns out to be a sham, then everybody that's looking for good accounting should support this,'' said Edward Nusbaum, chief executive officer of Grant Thornton LLP, the fifth-biggest U.S. accounting firm.

Cisco, the biggest maker of computer-networking equipment, stands to report 20 percent less profit when the rule forcing companies to record the cost of employee options kicks in later this year. Its proposal may help Chief Executive John Chambers open a new front in the campaign by Silicon Valley companies to protect an incentive they rely on to motivate workers.

``It's no secret that we're trying to get a more accurate valuation,'' Cisco spokesman John Earnhardt said. ``We have spent a lot of time on this issue and all we're trying to do is keep the option of using employee stock options.''

No Market Exists

The expensing rule, passed by the U.S. Financial Accounting Standards Board in December, also encourages companies to value the options using an ``observable market price.'' Unlike call or put options that trade on exchanges such as the International Securities Exchange, employee stock options can't be bought or sold, so there is no market.

Derivatives are financial obligations whose value is derived from underlying assets such as debt and equity securities, commodities and currencies.

Cisco has battled with the FASB for more than a decade, saying mathematical models overstated the value of options. As those efforts failed, Cisco, Qualcomm Inc. and Genentech Inc. proposed an alternative model that would have cut the value of options by about 80 percent. The FASB rejected it last year.

This time, Cisco took a softer approach.

Chambers, 55, hired New York-based Morgan Stanley, the world's biggest securities firm by market value, to develop the derivatives and dispatched Cisco executives to pitch the proposal to SEC officials including Chief Accountant Donald Nicolaisen, people familiar with the meetings said.

SEC Receptive

Cisco Chief Financial Officer Dennis Powell delivered a PowerPoint presentation about the company's plan in March to SEC officials in Washington, said the people, who declined to be identified.

Nicolaisen backs the idea of creating a market to value options and has been receptive to Cisco's proposal, said the people familiar with the discussions. He and Chester S. Spatt, the agency's chief economist, are studying the new security and haven't made a decision on whether to recommend it, the people said.

Nicolaisen, 60, declined to comment through spokesman Matt Well. Spatt, 51, didn't return a call for comment.

Although Cisco doesn't need SEC clearance to sell the securities, it wants the agency's backing before moving forward, Cisco's Earnhardt said. By getting the SEC on board, Cisco will avoid objections from auditors when it uses the derivative values to calculate the cost of employee stock options.

``If you don't have that support, then it's something I don't think we'd be willing to do,'' Earnhardt said.

Big Impact Possible

Widespread adoption of Cisco's plan could revolutionize the way stock options are valued, making them less of a drag on earnings. Kim Boylan, a lawyer for the International Employee Stock Options Coalition, an anti-expensing group, said other companies are considering the plan.

``They would have to look at the costs and if they were pennies on the dollar for what you would get under Black-Scholes, then I suspect a lot of companies will be willing to do it,'' she said.

Intel Corp., which has fought the stock option rule alongside Cisco, reported today that its $2.18 billion first-quarter net income would have been $333 million lower had the company treated employee options as an expense. CFO Andy Bryant, in a May 5 interview in New York, declined to say whether Intel, the world's biggest maker of computer chips, may follow Cisco in seeking a market value for its employee options.

``That's a good idea,'' Bryant said of Cisco's plan. ``There are a number of difficult stages it would have to go through before a plan like that could be put into practice.''

Expensing Struggle

Some of the world's biggest companies have struggled with the prospect of expensing stock options.

Microsoft Corp., the No. 1 software maker, in July 2003 stopped paying employees with options at a time when expensing them would have cut profit by about 25 percent. Microsoft CEO Steve Ballmer then gave workers a one-time chance to sell some unprofitable options to JPMorgan Chase & Co.

Bill Gates, Microsoft's founder and chairman, earlier this month said he regretted ever using stock options to compensate employees. Microsoft now grants employees stock instead.

Coca-Cola Co., the world's biggest soft-drink maker, abandoned a plan that would have valued its employee options using prices set by two investment banks.

Millionaires

Still, options have helped make millionaires at companies such as Cisco and Microsoft by letting even low-level employees profit from fast-rising stocks. Cisco's Chambers, who receives $350,000 in salary, has realized almost $350 million by exercising options during the past nine years.

As of July 31, 2004, Cisco employees held options to buy 1.35 billion shares at an average exercise price of $25.34, according to the company's annual report. The shares, then trading at $21, have since dropped and traded at $18.55 at 4 p.m. today on the Nasdaq Stock Market. They peaked at $82 in March 2000.

Cisco, the 16th-biggest U.S. company by market value, yesterday said fiscal third-quarter net income rose 16 percent to $1.41 billion on revenue of $6.19 billion.

All employee options have an exercise price, typically the company's stock price on the day they're granted. Once an option vests, or matures, the employee can buy the underlying share at that set price, pocketing any gain in the stock since the grant date.

FASB, SEC

The FASB and SEC Chairman William Donaldson pushed to have options treated as an expense, saying they represented a quantifiable cost to shareholders. Cisco has said relying on theoretical models would give investors an inaccurate picture of earnings because the real cost of an option depends on the company's stock price and often can't be known for years.

Cisco's new security may not be the ideal solution, either.

``The real risk, at least in the early going, is that these things are not going to be priced very efficiently,'' said John Finnerty, a professor at Fordham University in New York and a consultant who specializes in valuing stock options. ``Over time, as this instrument becomes more widely accepted, it could serve as a useful pricing benchmark.''

Earnhardt said Cisco can't predict what investors will be willing to pay for the company's new securities.

Cisco's derivatives would function under the same terms as its employee stock options, including the same exercise prices and five-year vesting schedule. They would be sold once and couldn't be traded or hedged. Settlement of any gains would be with Cisco shares.

August Target

Powell told SEC officials that Cisco wants to begin selling the derivatives as early as August and the company would need 15 buyers to create a proper market, the people familiar with the meetings said. Earnhardt declined to comment on timing of any sale. Melissa Stonberg, a spokeswoman for Morgan Stanley, declined to comment.

Cisco must begin deducting the cost of employee stock options from earnings in the first quarter of its fiscal year, which starts in August.

To contact the reporter on this story:

Robert Schmidt in Washington at [email protected].

Last Updated: May 11, 2005 16:21 EDT