Cisco and stock options

There is an interesting article on Bloomberg today concerning Cisco's decision to try to launch a new derivative security that will have employee stock option like properties. John Chambers, Cisco's CEO has been a huge opponent of stock option accounting and believes that models place to high of a value on stock options. Chambers is trying to come up with a new security because no market prices currently exist for employee stoick options.

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.

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.

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.