Cisco Seeks Approval for Option Pricing

Cisco Systems Inc., the leading maker of equipment computer networking gear, is seeking regulatory approval for letting the market determine the value of its employee stock options.

The effort could lessen the effect of stock-option expensing on Cisco's bottom line and have a broad impact across the technology sector, if successful.

"In order to get an accurate valuation for stock option expensing, Cisco is working on a market instrument that would match the same attributes of an employee stock option," said John Earnhardt, a Cisco spokesman, in an e-mailed statement. "We are awaiting guidance from regulators on this instrument."

Securities and Exchange Commission Chairman William Donaldson left open the possibility that the agency would approve Cisco's plans.

"I think it's a very interesting approach," he told reporters after a speech on Thursday.

A person familiar with the matter, who spoke to Dow Jones Newswires on condition of anonymity, said Cisco wants to enlist an investment bank that would turn to a number of sophisticated investors like hedge funds, perhaps as many as 15, which would bid on a small portion of the options and buy them, thus putting a value on them.

The investors would be bidding on the options just like they were employee stock options — taking into account that they are not tradable or hedgable and that they require time to vest.

The method would provide an alternative to pricing the options based on a theoretical model such as the Black-Scholes formula, which factors in volatility and time to expiration, among other factors.

Cisco's effort comes after the Financial Accounting Standards Board introduced a new rule in December requiring companies to treat employee stock options as an expense. This means that many companies, particularly technology companies which most often pay employees using stock options, will see earnings reduced by these new expenses when the new rule comes into effect later this year.

In response to the accounting change, some companies have accelerated option-vesting before the new rules kick in so they won't have to report it as an expense. Companies have also cut back on issuing stock options. Software giant Microsoft Corp. decided to replace employee stock options with other stock incentives.

The SEC last month pushed back the start date for the stock-option accounting rule to fiscal years starting after June 15, rather than fiscal quarters starting after June 15. The delay was a rare instance in which the SEC overruled FASB on the details of an accounting standard. SEC officials said companies needed more time to understand the new rules considering all the other recent accounting changes.

Cisco's proposal drew support from the industry.

A long-time critic of expensing stock options, Intel spokesman Chuck Mulloy Thursday said a market-based approach to expensing employee stock options appears to be a "fairly good idea and a step in the right direction."

Anne Craib, director of international trade and government affairs at the Semiconductor Industry Association, an industry trade group, said the SIA is in "100 percent agreement" with what Cisco is trying to do. According to Craib, a theoretical approach doesn't give investors comparables or transparent information and doesn't reflect the true costs.

Shares of San Jose, Calif.-based Cisco rose 15 cents to close at $18.70 on the Nasdaq Stock Market.