16-3 Stock Options 1

16-3 Stock Options 1 - Tech Companies' Liberal Use of Stock...

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Tech Companies' Liberal Use of Stock Options Could Swamp Investors, Drain Firms' Resource HEARD ON THE STREET By ROBERT MCGOUGH Staff Reporter of THE WALL STREET JOURNAL What should a successful technology company do with its earnings? Many investors would say it should reinvest in its business to promote growth. Few would say that it should pay dividends, which are distinctly out of style. And then there is this business model: a booming technology company should issue millions of shares to employees through stock options, then spend ever-higher levels of its earnings buying back stock, so it can go out and issue even more millions of shares to employees. Perhaps this business plan sounds more like a gerbil running on an exercise wheel than a recipe for business growth. Nevertheless, it is an increasingly familiar scenario at any number of companies, according to a new study of stock options of companies in the The study, by UBS Warburg economist Joseph Carson, found When Profits Pale By Comparison A comparison of company profits in 1999 and net gains on employee stock options at some S%P 500 companies; all figures are in millions America Online $17,512 Net Gain* 1999 Profit $762 Broadcom $24,595 $83 Cisco Systems $45,922 $2,096 Microsoft $48,044 $7,757 Sun Microsystems $17,103 $1,031 Yahoo! $26,811 $61 Aggregate $179.99 billion $11.79 billion * Calculated using June 30, 2000, stock prices, and number of stock options outstanding at end of fiscal 1999; deducts cost of exercising options. Source: USB Warburg that the volume of gains on employee stock options is indeed vast, and so concentrated in the technology sector, that it raises questions of how these firms will cope. To Mr. Carson, some technology companies will face a huge drain on their resources if they try to buy back enough stock to offset the flood of employee stock options washing their way, as many technology companies have done. "Clearly they're spending money on labor that could have gone into other forms of investment that would make their companies stronger in the long run," he says. What if the companies don't buy back
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16-3 Stock Options 1 - Tech Companies' Liberal Use of Stock...

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