Intel: Out of options?
Microsoft's decision to grant shares to employees could put pressure on the chipmaker.
July 9, 2003: 11:40 AM EDT
By Justin Lahart, CNN/Money Senior Writer
NEW YORK (CNN/Money) - Microsoft and Intel's businesses are so joined at the hip that the software and hardware bundle that runs most personal computers has come to be called "Wintel".
But in its decision to do away with the stock options it grants employees, Microsoft was hardly a friend to Intel.
Among the many tech companies that have made a habit of doling out stock options, but not treating them as an expense against earnings, Intel is king. Despite years of criticism of the practice (from the likes of Warren Buffett and former Fed Chairman Paul Volcker, among others), the company has steadfastly contended that the way it treats options is entirely appropriate.
Intel says that treating stock options as an expense, like other forms of compensation (such as wages and benefits), doesn't make sense because it penalizes the company twice. First, it counts against income, and second, because it increases the number of shares outstanding, it dilutes earnings per share. That doesn't make sense, the chipmaker says.
A load of bunkum, say the company's critics. They point out that as Intel has steadily doled out options, its diluted shares outstanding have remained more or less the same, going from 6.52 billion shares at the beginning of 1998 to 6.53 billion shares at the end of the first quarter.
How come? Because Intel has steadily bought back $20.1 billion in its shares during that period -- under accounting rules that stock buybacks don't count against income. If they did, according to Julius Baer head of U.S. equities Brett Gallagher, instead of generating $25.7 billion in cash since 1998, Intel would have made just $5.6 billion.
"They're running the greatest scam in America," he said. "They're a huge cash generation machine, but none of it finds its way to shareholders."
An extreme view? Perhaps. But there is little doubt that the earnings numbers at Microsoft, which had already made the decision to treat options as an expense and now has decided to grant shares to employees instead, are going to look a whole lot less fuzzy to investors. The pressure on Intel to change its ways will mount.
Another of Intel's contentions on the employee stock options front is that there is no reasonable way to put a value on them. Yet Microsoft has struck a deal with J.P. Morgan allowing employees to sell their existing options to the bank. Apparently the company believes that putting a price on options is in the realm of possibility.
"Intel says it can't put a number on the value of employee options," said Gallagher. "But any estimate is closer to the truth than zero."
