On page 91 of Google's 10-K Annual Report Dec. 31 2006,

there are some very difficult to understand calculations

Heres an example:

A. It is stated that during 2006, "8,128,214 stock

options were exercised at a weighted average exercise

price of $66.20."

It is also stated that:

"The aggregate intrinsic value is calculated as the

difference of the exercise prices of the underlying

awards and the closing stock price of $460.48 of

our common stock on December 31, 2006".

So it seems to me that you subtract $66.20 from

$460.48 and multiply the difference by 8,128,214

to get the total aggregrate intrinsic value for those

8,128,214 options upon exercise.

Let's do it:

($460.48 - $66.20) x 8,128,214 =$3,204,792,200

But the aggregate intrinsic value of all options

exercised during 2006 is shown on page 91 to be

$1,904,000,000. Where is the other $1.3 billion?

Maybe the definition is wrong and Google meant

that the intrinsic value means the difference

between the exercise price and the closing price

on the day of exercise. If that were the case, we

merely determine the exercise price and determine

the closing price and we get the intrinsic value.

Google fluctuated betwee 335 and 513, making the

average of 424. So using 424 as the value of the

stock, the intrinsic value averaged

358 x 8,128,214 = $2,909,360,000.

If we knock off the 24 and bring the average closing

price to 400, we still have an intrinsic value of 334.

Then multiplying by 8,128,214 we get $2.71 billion

not $1.90 billion.

If we took the lowest price for the year (i.e. 335)

the results are:

(335-66) x 8,128,214 = $2.20 Billion not $1.90 Billion.

Regardless of what the above figure should be, Google

wrote off a mere $393 million of options compensation

expense to employees and executives for 2006.

The $393 million figure is artificially low as unrealistic

assumptions were made in order to get it as low as

possible.

What kind of deception is this?

We noticed that Google dropped its estimated write-off

from the vested Transferable Options to $230 million from

$260 million. Why? Are they realizing that the TSO

program encourages an early exit by holders of

at-the-money and out-of-the-money options who would

otherwise hold them longer.

This early exit reduces the expected time to expiration

and therefore lowers the "Fair Value" of the options at

grant.

The whole idea of the "Fair Value" cost of the Transferable

Feature materially changing the value of the ESOs is an error.

The idea of adding two years to the expected life of the

ESOs because of the Transferable Feature indicates a

misunderstanding of the concept of "Fair Value" as it

relates to employee options.

The more I read about the Google options, the more I become

convinced that whoever is doing the valuing and designing of

the Google options and plans is either totally incompetent or

is deliberately deceiving anyone who reads their options

information.


John