A recent Observer report revealed that when stock options are taken into consideration, many companies are effectively trading at a loss.
The report claimed that the net profit of 167 of the 200 largest US firms would be just over one third of what they actually declared in 1998. Microsoft, for example, reported a net income of $4.5bn (£2.9bn), the figure being reached using a full cost accounting method of calculating the profit.
Taking into account the amount it owed in stock options, it was in the red to the tune of $17.8bn.
While this is no immediate threat, it does question what the real motivations are for senior executives. Remember, options give employees the right to buy shares in the future at today's prices. Once they have their options in place, executives drive the stock price up to the highest possible level so when they take out the options - or when the company is sold - they can line their pockets thoroughly.
The only way is up
This is very worrying for the channel and for the whole industry. If the objective is to up the stock price, there will always be a need to talk up the company. There will also be a need to keep sales volumes moving upwards.
It may be necessary for some companies to buy back stock, so that they can meet options. Then, as the desire kicks in to make the options work, there will be a drive to get the price up. But the two forces work against each other. If there are more options to fulfil, the company will be paying a high price for them just so it can give them back to its staff for nothing.
It will be doing this in return for services rendered by those executives, of course, but for how long can it go on doing that? Also, in giving that equity to its executives, it loses the opportunity to sell the shares on the open market and raise further investment. Ultimately, its ability to develop may be restricted, unless the beneficiaries of the options can be persuaded to pump the money back in.
Time for a takeover
As a result, when growth becomes difficult, there may be a tendency for the company's senior people to seek out a takeover or merger that will create a bigger company with a higher perceived value and reset the dials on the options clock.
A merger or acquisition may be sought anyway just to get the stock price up. If a company is being stalked or is the subject of speculation, its price always goes up. Executives who take out options at the right time can make a killing. They may not actively seek out a takeover, but they are likely to be a bit more sympathetic to the idea.
So what is driving consolidation? Is it global competition, or is it greed? Those who have taken their options and moved on are fine; but when the bubble bursts, whoever has yet to take the options or is left holding the stocks will lose out. The winners are, quite literally, taking it all.
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