Albert Meyer

Baidu vs. Google: A Free Cash Flow Analysis

A belated reply, following the logic of “endoftheworld” above: During the period 1995 to 2007 Cisco spent virtually the entirety of its free cash flow to repurchase approximately 2 billion shares. During the same period, it issued 2 billion shares to employees. How did shareholders benefit? Zilch. You first inflate the share count and then you mop up the dilution.

Here’s the logic: when a company issues options IN LIEU OF CASH COMPENSATION and then buys back the stock issued as a consequence of the options program, it has merely paid cash compensation by means of a two-stage process. There are stock buybacks that shrink the pie (for example, if Berkshire were to repurchase stock) and stock buybacks that merely mop up dilution (for example, Cisco’s stock buybacks, for the most part)

Cisco’s employees contributed $15 billion through stock option exercises during the period under review. Hence, my calculation of free cash includes an adjustment that calculates the cost of repurchasing the stock issued to employees net of their contributions on exercise, to arrive at “unfettered free cash flow.”

By the way, the cost of mopping up (market value minus exercise price = discount at which stock issued to employees) is the very amount that companies claim as a tax deduction for stock-based compensation.

In summary: for a more reliable free cash flow number, adjust conventional free cash flow for the cost of mopping up stock option diluting.

Baidu vs. Google: A Free Cash Flow Analysis

Oh wow... we had some spirited debates... I forgot my handle... something311, I think...


On Oct 28 10:37 AM Peter Mycroft Psaras wrote:

> Yes I am the same ;-)

Baidu vs. Google: A Free Cash Flow Analysis

Thanks... are you the same Mycroft who was active on the Coke Yahoo board in 1998?