Financing America

Have you ever wondered how corporate America keeps growing and expanding? What keeps companies like Intel and Cisco Systems on the top end of the food chain, and for so long? It all has to do with ways they grow their company, and here are some of those ways.

At one time I worked for a private entity in a large brokerage and we initially had one client, Cisco Systems. At the time Cisco had about 44,000 employees with stock options and our job was to advise them about exercising their options and how to go about reinvesting them. Some had a few hundred shares, while others, like John Chambers, had millions of shares. One of the ways Cisco would grow their company was through the use of granting employee stock options to the movers and shakers of the companies that had the technologies they needed.

For example: say that Sun Microsystems has a particular technology that Cisco has identified as something they need. They can try to develop it themselves or they can offer key people in Sun Microsystems large quantities of stock options. They would offer the options at pennies a share so the new share holders can exercise and sell the options at a huge profit. When you exercise your stock options you pay for them at whatever the price was set at, then you can hold the shares like any common stock or you can sell them at the current market price. A person in high demand might get two million options at the price of three cents a share. He pays the three cents and sells the shares for fifteen dollars a share. Pretty good deal isn't it? I realize that is an oversimplification of the very detailed and paper intensive process, but there is really no reason to go into it here.

Another way Cisco grew and kept up with the latest advances in technology was through the acquisition of smaller companies that already had the technologies they needed. The group I was with helped facilitate the transition by working with the new employees. Many of those new people had never had stock options and they needed to be educated. So had had then before but needed advice as to the tax ramifications of exercising the options.

For example: if you exercise your options but do not sell them, it is still a taxable event. Your are taxed on whatever gain there is between the option price and the stocks current market price. Many people have a hard time swallowing that pill. How could they owe taxes if they did not realize the gain? The answer is, the realized a gain, but it was a paper gain, and that still counts.

Some those new very happy employees had just become instant millionaires and needed to what to do next. For the guy making fifty thousand a year, suddenly having ten million dollars can be a overwhelming experience. They needed to know how to protect that once in a lifetime windfall. At that time that I was with the group Cisco bought several companies every year so we kept very busy running back and forth to their campus in Santa Clara.

Not everyone has the capital to go on a billion dollar buying spree, so those are left to the other ways to grow and to finance that growth. In part two I will go into the five ways companies finance their expansion.