Why I Don't Like Stock Buybacks
RIM, the company that makes Blackberries, announced a weak quarter yesterday, and then announced they were initiating a stock buyback. I don't like stock buybacks and I figured this was an opportunity to explain why.
A decade ago, I was Chairman of the Board of a public company called TheStreet.com. It is still a public company but I have not been involved with the company for eight or nine years.
The company raised a huge amount of money in its IPO in 1999 and then after the market broke in early 2000, the stock was trading below its cash value. We talked about this at the board and decided to do a stock buyback.
For those who don't know what a stock buyback is, it is when a public company announces that they will be going into the market and start purchasing their own stock. When they purchase their stock, they typically retire it so that the number of shares outstanding goes down.
Stock buybacks are very popular with some investors as a way for a company to transfer value from the company back to the shareholders. It is like a dividend, except it is taxed as a capital gain, not ordinary income.
I don't remember the exact details of the buyback at TheStreet.com but we started buying the stock and it kept going down. We kept buying it. But we were losing money on each buyback because we were overpaying for our own stock as it kept going down.
I didn't understand what was going on. We had more cash than it would take to buy back every share in the company and yet the stock kept going down. We eventually reduced the number of shares outstanding by a pretty significant number. I don't remember what it was but it could have been as high as 25% of all the shares that were outstanding before we started the buyback.
Eventually the market came back and the stock rose. And the company started making money and its reported earnings per share were higher as a result.
But I don't view that stock buyback as successful. It didn't fundamentally change the company in any way. We just gave back a lot of cash to the investors.
This was all happening in 2000 and 2001. If I think about what we could have done with $25mm or more of cash in 2000 and 2001 to transform that company, there are so many obvious ideas in hindsight. We could have invested in new lines of business. We could have bought a bunch of companies. We could have made a number of moves that would have fundamentally changed the company. And we had a lot more cash than $25mm. But we let the cash sit in the bank and worse we gave a lot of it back to investors in a manner that did not do much for the company.
So if you go back to the reason that the stock kept going down as we were buying it back, I think I understand why now. With our stock buyback we were signaling to the market that we had no good ideas about how to spend that cash. We were signaling that we didn't see much of a future in our business. And smart investors bet against those kinds of companies, managements, and boards.
So when I saw the headline this morning that RIM was doing a buyback, I was saddened. I've been a Blackberry user since 1997 or 1998. RIM has been a great company that has driven so much innovation in the past fifteen years that has made my life better and the lives of many others better. I have to believe that if they got aggressive, they could find uses for all of that cash they are sitting on. I wish they would do that instead of buying back their stock.
“But I don’t view that stock buyback as successful. It didn’t fundamentally change the company in any way. We just gave back a lot of cash to the investors.”This is the most incredibly asinine statement I’ve seen about buybacks. You are upset because the owners of the company actually received some return on their investment?Buybacks are neutral. If your stock is cheap and you have few growth opportunities they make sense. IBM is reasonably cheap and for a company its size; no growth opportunities. Buybacks are an incredibly sensible, rational use of free cash flow. Take a look at Microsoft for the opposite case.
please don’t use a word like asinineit is insultingwe like to have calm and respectful discussions hereand your comment is easy to addressthe investors can get their cash by selling their stockthey don’t need the company in the market buying back stock to do that forthem
Investors selling stock in market drags price down (more sellers than buyers). Investors selling via buy back pushes price up (enterprise value/less shares in issue = higher price per share). Therefore very different beasts especially for investors doing a part disposal.Surprised you don’t support as could be argued buybacks are “lean start-up” mode for grown up companies, i.e. keep them lean to keep them keen.
The issue here is that the money could be used in other areas to turn that say $10 into $100 instead of investing into an area where there is almost no benefit. In the long term, the company is really shooting itself in the foot since they could let money make more money.With the rise in the iOS and Android platform I’m not surprised that RIM’s now on the downtrot but hopefully they will live to fight another day.
It sounds like dividends play a good balancing role versus reinvesting cash, or sitting on a bigger pile. The buyback signal can come across as a business who’s dropping and a dividend pays out regardless of public shifts in perception.There’s nothing intrinsically wrong with dividends, it’s just that buybacks are not equivalent.Buybacks that shift a company from public to private are an entirely different argument.
I think the other criticism that I’ve seen best expressed by Mark Cuban is that they reward shareholders selling your stock, not those who hold all their shares. Dividends are a way to rewards current shareholders and encourage them to hold the stock.Granted their are tax pros/cons between dividends vs. buy backs, but that’s probably something we should be lobbying congress about—not creating lame incentives.
I was going to mention Cuban’s position on this too. He’s argued that dividends are better than buybacks on his blog more than once (e.g., here). I think he’s right, for the most part. I’m not as troubled by buybacks when a company’s shares are trading below book (and even less troubled by them when the shares are trading below net cash), but that’s not the case with most buybacks. An example of a company that has squandered a lot of money on buybacks at the expense of its long-term shareholders is Exxon. They lump buybacks in with dividends as returns to shareholders, but that’s nonsense. The buybacks do nothing for shareholders who don’t sell their shares, whereas dividends put money in their pockets (and for those who own their shares in IRAs, the taxes on dividends aren’t an issue anyway).
“buybacks do nothing for shareholders who don’t sell their shares”this isn’t necessarily true. it could be, but not always. assume a company has a $900 stream of cash flows, $100 of excess cash on hand, and 10 shareholders. the company is worth $1000 ($900 + $100) and $100/shr ($1000/10). Consider what they can do with that $100 of excess cash.1. pay a dividend: the company is now worth only the value of the cash flow stream of $900, so each share is worth $90 ($900/10). add to that the $10 each shareholder gets in cash from the dividend. so pre-tax, each shareholder is no better off than before — $90 + $10 = $100.2. buy back stock 1: the company uses the $100 to buy out one shareholder. the company is now worth the value of the cash flow stream of $900 only, since it no longer has any cash, making each remaining share worth $100 ($900/9). the shareholder who is bought out also has $100, so no one is better or worse off.3. buy back stock 2: suppose the stock is trading on an exchange for $90 and the company can buy it for that price. the company is now worth the value of the $900 cash flow stream PLUS the cash it has leftover of $10, for a total of $910. this means each share is worth $101.11 ($910/9).buybacks can benefit existing shareholders if management buys the shares back at less than they’re worth. do they always do this? absolutely not. not by a mile.of course there are all kinds of ways to read why management is buying stock, from signaling to potentially making eps targets easier to reach, but they can benefit existing shareholders while actually penalizing, in a sense, selling shareholders.michael mauboussin wrote a good piece a couple years ago on share buybacks, and had this to say:”a company should repurchase its shares only when its stock is trading below its expected value and when no better investment opportunies are available.”
1) You have no idea what the company’s “stream of cash flows” will be. Neither does the company.2) You can spend a dividend. You can’t spend your theoretical share of a future stream of cash flows. This reminds me of when investors mention the earnings yield of a company and say it’s a great deal because it’s higher than the yield on a bond. That’s comparing real money flowing into your pocket to money theoretically accruing to your benefit as a shareholder.3) Saying that a company should only buy back its stock when it’s trading “below its expected value” is essentially saying it should buy back stock whenever its executives want to, because anytime corporate execs want to buyback shares (e.g., to counteract the dilutive effects of the options they granted themselves) they can argue they are doing so because the shares are trading below their “expected value”.________________________________
1) first, you may not know what the stream of cash flows is, but it has value regardless. second, you and i might not agree on what that value is, but it still has a value to each of us. so, if management is able to use cash on hand to buy back a piece of those cash flows from someone else and pay a price below the value the rest of its shareholders place on that piece of cash flows, then the remaining shareholders are better off. explain to me how this isn’t true. if you believe price always equals value, then that’s another argument.2) conceded. i don’t think i said anything about this. some investors want dividends; other don’t.3) don’t conflate the reason management *should* (or says why they) buy back shares with the reason management *does* buyback shares. the above justification isn’t a blanket permission to buy back shares willy nilly. there were two very big conditions before buybacks were a good use of cash. if you don’t think management is interested in creating value for shareholders, don’t buy the stock.
You are validating what I was once told by a senior colleague. In his view: “A stock buyback is a sign that a company has run out of ideas.”I think that sounds basically correct. It is very rare to have cash positions outrun idea positions. That said, I think it may sometimes make sense for very large companies where it is one tactic among many, to manage cash and keep the stock and eps on a predictable trajectory the market likes. It’s a slippery slope from there to making propping-up share prices the mission of the company though.I also think the dividends vs. capital gains argument is shaky. The dividend may be taxed higher, even at a predatory rate, but at least it is real. The buyback prop-up may fail utterly, and completely fail to arrest the momentum of a falling stock, and there may be no actual capital gains (compared to the do-nothing trajectory and recovery-path of the stock).VenkatAdded after further thought: I think the capital gains argument is valid *if* there are predictable earnings in the picture. That way market cap represents fundamentals via EPS, and after averaging out noise, redistrubutes over smaller base after buyback, causing actual capital gains that are known to be meaningful because EPS will go up. This means buybacks in a bubble of pre-revenue Web stocks are potentially meaningless if there are no real signals of fundamentals.
I agree on the signal… To me, buying back shares is the exact opposite of VC investment : invetsors want out because they don’t value the company’s future as much as they used too.Yet, I think it is sometimes a good way to “end-up” a story with everybody happy eventually. There are cases where entire industries are over-invested and where eventually everything collapses (internet in 2001, automotive…) and this collapse is blind (no matter how good or bad a company is operating).Having investors cash-in is also maybe a safe way to adjust to lower expectations while still generating profits. Don’t you think?
The way you describe things implies that the Company is king, not the shareholders, and that those pesky shareholders, once parted from their initial investment, should shut up now that they have put up.I may be being naive here, but the Company is owned by the shareholders and the board are supposed to represent those shareholders. If the board decides to instigate a stock repurchase, surely that should reflect the will of the shareholders. No-one is forcing them to sell their stock back. And if ultimately the company ends up with no cash and the shareholders end up with that cash, then all is not necessarily ideal, but it is ok or even good.Maybe the shareholders have arrived at the unfortunate realization that the original idea that they invested in turned out to be not so good. Why should they now let the Company perform a few random gambles in new or aggressive with that cash pile. In this case, giving the shareholders the right to sell their shares back to the company wold seem a sign of good board direction wouldn’t it?
because you can sell your stock in the open marketyou don’t need the company buying its stock to do that
Better solution, fire management.
In an interesting CNBC article last week on buy backs – $187bn YTD (http://bit.ly/dzjqiB), they were spun the other way“Buybacks are a signal that management is being cautious with its capital, not squandering it on empire building,” said Brad Thompson, Frost Investment Advisors. – i dont buy it – just sayin – perhaps a more telling reason for RIM’s decision =”Share buybacks also help to boost earnings per share, which are a key determinant of executive pay, by reducing shares outstanding.” – so basically its not that RIM is out of ideas and throwing in the hat, its that management want a pay rise
LIAD that’s an interesting and sinister angle. I like it!
Definitely one of the best reasons why RIM might be doing the buy back. I would understand that if a company was at a premature stage (such as Fred W’s example of the fairly recent IPO by TheStreet.com), then the money could have gone to CapEx, other investment ventures, or further operating expenses. But if RIM has been doing reasonably well with the market these days; then the key people responsible for the company growth probably do deserve to treat their families out to a nice dinner – or more. I may have been influenced by this recent blog on why top Wall Street bankers / CEO’s do deserve to get paid well:Memo to Wall Street: You’re Worth More Than 500k http://bit.ly/alUCSm Despite public outcry of several CEO’s such as Goldman, Citibank, etc getting huge bonuses; Obama explained that these same leaders were the ones who kept the economy afloat, and are still working hard to get US’ financial state back on its feet. Obama would not want to entertain the fact that the US government would pay outside international entities to rescue our economic challenges – or consider it as one of our last option. Therefore, these leaders’ hard work deserved some good compensation for not further digging down the hole.
Investor alignment has a way of working out rationally when more than half of the money they invest is their own. We have pretty huge funds where managers can do very well even if some of their investments trend to zero. The incentives on returns have to be carefully devised (small carry, shared loss, shared growth – VCs know much more about this than me).Plus, anytime raw liquid capital is generating new capital without providing a social benefit (what is wealth afterall) we should question the source of perceived growth.
Generally if the denominator changes, then so does the threshold for such a bonus payment. There are probably comp committees that miss this little fact, but most comp packages take into account changes in milestone based payments.
i also think most buybacks occur for sr management to bump their bonuses. if the majority of mgt compensation comes from the quarterly stock price, and buying back stock gives a short-term bump by just snapping the fingers……then its bound to happen more often than is in the actual best interest of the company. true value creation requires a long-term horizon.in big and complex structures and organizations, everything always comes down to alignment of individual incentives. “people” make decisions, not “companies”. misalignment of incentives explains most of the seemingly “dumb” and “self-destructive” stuff that happens (ex. subprime mortgage crisis, iraq, greek debt, pollution, whatevah…..)
As I see it, there is only one good reason for a stock buyback, and that is to minimize the tax bill for shareholders. I guess you can debate how good a reason this is.However, management is most of the time compensated as a function of the share price, so for them it makes sense. If they know that the fundamental value of the firm exceeds the market value (as your example suggest), it makes sense for them to buy back shares, retire them and reap the rewards when the shareprice bounces. This will only benefit management though. Sharholders as a group is actually worse off (as they have to pay higher bonuses to management).
“We could have invested in new lines of business. We could have bought a bunch of companies. We could have made a number of moves that would have fundamentally changed the company.”And those moves could have changed the company for the worse. It’s one thing if there were a truly compelling investment the company passed on, but spending money on acquisitions just because it’s burning a hole in your pocket doesn’t increase shareholder value. In fact, it often has the opposite effect. Academic studies have demonstrated that dividend paying stocks generally outperform non-dividend paying stocks. One theory to explain this is that the discipline of having to pay out a dividend forces a company’s executives to be more judicious in how the company deploys excess cash, so they make fewer ill-advised acquisitions.
In RIM’s current position, and this includes Nokia, they would be better going on an acquisition rampage to add new features to their lineup. This is only going to delay solving the problem where there has been a massive shift in the mid-high end mobile market.
That may well be the case with RIM today. That may even have been the case with TheStreet.com a decade ago, for all I know. But Fred hasn’t made that case. My point was that spending money on acquisitions just because you have the money is a bad idea.There are numerous examples of companies burning cash on acquisitions that end up losing money for their shareholders. By the time everyone realizes how much money has been blown, the investment bankers, lawyers, etc., have already pocketed their fees, and the CEO who championed the ill-fated acquisition may already be out the door with his golden parachute.
I guess you’re right in the sense that it shouldn’t be investing because you can. I was actually think more along the lines of acquisitions for consolidation of the core business. Or maybe in RIM’s case just to shift to the Android platform with the BlackBerry system on top, similar to how Motorola and HTC have done.Speaking of which, Motorola has really reinvented itself with its Android releases.
I’ve helped many private companies reinvent themselves with acquisitions. Not all of them work. But if you pick them up cheap, as we could have easily done in 2001 and 2002, you can afford to have some misses. Its like a venture fund inside an operating company
I was going to comment that you were thinking like a venture capitalist at TheStreet.com. You make a good point though about cost. I suppose you’re right that if you have some interesting acquisition candidates that are trading cheap as spaghetti, you can afford to throw a few against the wall and see what sticks. Not exactly the same thing as Time Warner paying up for AOL at the peak of the dot-com boom.________________________________
It can also mean “We are going down a little now… we will bounce back LIKE A MONSTER and we are confident … so give it to me than to someone else” … eventually street.com won big right?
thestreet.com did not win big unfortunately
It’s a defensive posture and signal, I agree.It’s often a great idea in private companies though, to get rid of a troublesome ex-whatever and move on with the business of winning.
I had trouble posting a comment, so I made a blog post out of it.Here it is.
Isn’t your point really about reinesting for growth vs. distributing cash to shareholders, more broadly speaking? Buyback could be dividend and most of the argument about The Street wouldn’t change. No? The difference though, I think, is that with a buyback the company is signalling a one-time non-recurring event, a market opportunity to acquire undervalued stock, and could be a bullish signal, whereas a dividend repeats and signals a mature stage for the long term. Had RIM declared a big regular dividend, that would be bad, but a buyback could actually be a positive sign about where management sees its prospects.
And a follow-up comment in reply to myself: The largest tech companies are currently sitting on a quarter of a trillion dollars in cash. HP’s acquisition of Palm, that seemed so huge, will be paid for with interest earned on that enormous balance, even in today’s low-rate environment.So, what’s the more negative signal? Buying back shares, paying dividends, or just sitting on cash and doing nothing?
Fred, certainly an important topic for discussion.I understand your sentiments, and agree that it has less to do with direct impact on shareholders (because an individual can buy or sell shares when they want) than it does on corporate asset allocation. If a company is buying back stock and more focused on defending their price (which is how central banks so often drain their reserves by seeking to defend their currencies in the face of overwhelming market forces) than in investing in value-creating projects, this is clearly bad. However, if a company has either (1) run out of good, high ROI projects to invest in or (2) has truly excess cash beyond the level at which it needs to comfortably operate, absorb market shocks and have excess to invest in high ROI projects, then it should return the money to shareholders. Just like a start-up, too much cash at large corporations can lead to bad, undisciplined behaviors and a squandering of shareholder funds. I can point to dozens of examples of M&A follies gone awry, in large part because corporations essentially had more cash than they knew what to do with and simply didn’t have a corporate culture of returning excess cash to shareholders.So, I really believe a more textured answer to the question you raised is required. Your post applies to growth companies who have strategic alternatives and don’t have the excess capital to cushion market volatility and provide sufficient funds for corporate development. However, it doesn’t fit well with companies like Microsoft and some of the big pharma companies.I penned a few posts on this issue some years ago:Apple and optimal cash balance: http://www.informationarbit…In support of buybacks: http://www.informationarbit…Roger
Buybacks are a great thing for large cash-generative businesses in commodity or cyclical industries. For a tech company, it’s a toxic signal. My bet is this was forced by institutional shareholders who are increasingly nervous about management.
sorry, double post, move along
Company buybacks of public shares is the Ouroborus of value.
Did you see the article in the Journal yesterday about how developers hate designing for the Blackberry, because there’s no money in it and the app design process is byzantine and laborious?http://online.wsj.com/artic…The only two things maintaining RIM’s market share are corporate policies that mandate Blackberry usage and AT&T exclusivity on the iPhone. Both things will end soon. I don’t know of many people who are as passionate about their Blackberry as most iPhone users are about their phone. Sure, BBM has its devotees, but I’m not sure how sticky that is – after all, iPhone and Droid have cross-platform IM as well.If I were the type of guy who traded individual securities, I might consider a short position in RIMM.
I dont believe this is a one size fits all discussion – a small “growth company” like TheStreet.com sends a terrible signal by investing in its own stock. Its investor base is likely made up of people who have a high risk tolerance, and are expecting the company to invest in high-risk, high-reward projects (presumably that the investor cannot buy into directly). If the company is simply buying back stock, then TheStreet.com investors are better off investing in companies that ARE finding high-risk, high-reward projects.BUT …. if a company like ATT or GE buys back stock, this is often because Investors are solving for risk … they want the compay to behave in a way that minimizes risk at a certain level of return.I think the tough cases are those like RIM, whose growth is slowing, and therefore they have to decide which type of investor to attract.
This is exactly right.
Certainly seems like an action from a state of weakness. Therefore in effect you are signaling you’re own weakness.Thanks for the post. I can easily imagine a small startup feeling that it made bad decisions with issuing shares early on and wanting to buy them back to increase the value of the founder’s equity. If not signaling weakness, it’s at least signaling complacency or ambivalence about the company’s future. This may or may not be the case but the market doesn’t care.
A buy-back is neutral as you said. Those holding the shares get better share of profits and higher valuation while those selling get their money. In my experience buy-back is used1) when company wants to defend its stock price. Generally it occurs when large investors (those with significant board presence) in the stock have bought the stock at high prices and they can lean on the management. I have seen companies with low leverage build leverage and cash positions and initiate a buy-back.2) Investment bankers institute an “intellectual capture” of the board and/or management. Clearly, interested parties at play.3) A dominant shareholder wants to rebuild his/her management control. Typically points to empire building tendencies. After the buy-back, these companies start to disregard share holder interest ever so slightly.A lot of what I said is predominantly applicable for established companies going public. Example, DLF (Indian Real Estate company) IPO debuted at INR 570 odd, they initiated a buy-back at INR 330 odd rebuilding promoter stake in the company. It also did some really weird business deals otherwise.It does imply that company does not find new avenues to invest. I would say that it reflects more on company’s ability to initiate green-field growth rather than through M&A as the latter is more valuation centric.
With all the free cash flow from a lack of investment ideas, would a leveraged buyout be preferable? Take the company private and manage it as a mature enterprise or better sell it to someone who would use it as a cash cow per the old BCG matrix? Time to call Silver Lake?
Fred, it’s perhaps a bad idea to write-off all buy backs with just one case study.Often they can be very accretive.For example, if crude oil is trading at, say, $100/barrel and an oil company’s mkt cap values its own reserves at, say, $50/barrel – then it makes perfect sense for the company to buy back it’s own stock. It’s like buying dollars for 50cents.As you correctly point out, though, buy backs make less sense when the company overpays for its own stock.
that’s one of the problems with being public. TheStreet.com could have used the cash to reinvest in theory, but it would have been punished by the market for losing money. That said, its stock might have done exactly what it did anyway, and you would have had investments to show for it.
Just imagine what you could have done with close to 100mm on RP’s balance sheet in 2001 and 2002 matt
Yes, ECOA would have worked!
I think you have uncovered another issue here. Fred understands how a few million bucks can be turned into a few hundred million efficiently. The management of many large companies do not. Fred, how many companies could you fund with the money RIM will use to buy back stock? Or RIM could hire some great talent and build a new operating system for mobile devices. Or RIM could build a completely new form factor or a hundred other things. Unfortunately these will not move the needle in RIM’s case and yes they have no ideas. The capital that RIM will spend on stock will be redeployed to the marketplace. Capitalism works.
I’ll agree that, in a lot of cases, a buyback is an inefficient use of capital. But I bet that there are a number of companies which, in their heady early days, put way too much equity out into the market. That can hurt their valuation in the long run, especially if there are also a lot of options sitting on the books. In the battle to stay in control of dilution, a buyback is a good weapon.Of course, you only do that if you think the market is undervaluing your stock, otherwise it’s a waste. It sounds like thestreet didn’t really have that problem as the market kept falling in the face of a big buyer.
I generally agree, but I can think of two situations where a company will do a stock buy-back1. when the company is clueless and doesn’t know what else to do with cash – that’s the position you outlined, and in this case, you are correct to run from the company2. the company has reached a plateau and sits on a nice and safe repeatable business, with no major growth area – while it sounds similar to situation #1, it’s not. In that case, a buyback (or dividends) makes sense. And of course, stock growth is not to be expected any longer.
Interesting point. RIM is definitely not in position 2 as the mobile market is growing like crazy. I had a bad experience with RIM as a developer but it is scary to think it could be number 1.Could a company use stock buy back as a cover for buying out a large, influential investor at a guaranteed price? (To answer my own question, I guess that would be unlikely as any investor can sell.)
I think there are generally 6 broad ways a company can use FCF (free cash flow) on its balance sheet:1) Build cash on the balance sheet2) Invest more in the business segments to drive organic growth3) Acquisition(s)4) Share buybacks5) Increase its dividend payout (or start a dividend)6) Pay down debtAn efficient capital structure is a combination of all of these things. A share buyback fundamentally increases total shareholder return (which some might say is a good thing), rather than keeping FCF on the balance sheet, which does not. In the environment of 2001 and 2002, which combination of 1-6 would you have proposed for TheStreet?
Well in hindsight I think 2 and 3 would have been best
For tech companies, it’s a weird idea.But for old school companies that don’t have a lot of opportunites for growth, it’s a nice way to reward long term shareholders.RIM should use this money and buy some app developers to help make their phones more useful/wanted.
RIM wouldn’t know what to do with a developer if it hit them in the face. (And I tried.)
Stock buybacks should, in theory, contribute to total shareholder return, by increasing the share price of the stock and decreasing dilution of shares. However, I think there are 6 broad ways to deal with FCF (free cash flow):1) Build cash on the balance sheet2) Invest more in the business segments to drive organic growth3) Acquisition(s)4) Share buybacks5) Increase its dividend payout6) Pay down debtAn efficient capital structure is one that employs all things 1-6 at the right time. Perhaps 2001/2 just wasn’t the right time for using (4), but I think that a combination of these tools signals sound fiduciary management and a commitment to shareholders, which is important for a public company.
Maybe tech companies have a harder time keeping effecient capital structures because they have to be constantly innovating. if you are in a commodity business (recylcling vinyl for future use lets pretend) unless some new use for your commodity comes up, earnings are going to be pretty stable and sto your structure should be stable.A tech company innovating has to be both large (stable base) but agile (something associated with small things) Considering the amount of money these tech companies sit on, maybe it is a signal that they want to re-adjust their captial strucutre in order to do one of the other 5?
Looks like most of the angles are covered here. I would add the following:1. The first and most fundamental question for a company is whether they have growth opportunities or not in their business – or if they should return capital to shareholders. Current tech companies – given the fast pace of change – have decided against returning cash for the most part – as they feel the huge cash hoard will give them a competitive advantage somewhere down the line.2. If you do choose to return capital – there are often tax implications regarding dividends versus share repurchases. Dividends are taxed individually (although most institutional shareholders are tax free entities anyway – but there is pass through on mutual funds to shareholders ultimately) I hear Cuban on buybacks essentially enabling selling shareholders to get liquidity – but the alternative would be to knock the stock down – so I don’t buy it. All things being equal – share repurchases drive up the EPS by driving down the shares – so if EV remains the same – the stock should rise for every remaining holder who can choose his or her own time for liquidity.3. Of course all this is very academic. The truth is that you need to look at the incentives for the players involved. Most execs are compensated with options and thus incented to do whatever gets the stock higher. Repurchases should have this effect – so they are popular with managers. Companies with large family holders (see some media companies over the years) have paid out dividends because the family lived off of these dividends – the decision had nothing to do with the shareholders per se – just a small collection of them who controlled the company.4. There is a reinvestment issue with dividends which many fund managers struggle with. If the money comes back – they have to reinvest it. That is their mandate – and many would much rather see the $ go into share repurchases – not only should the stock rise somewhat – but they avoid the reinvestment question.5. There is a signaling issue. Dividends are viewed as safe and secure (try cutting a dividend and see what that does to your stock price given that all dividend funds that owned your stock will have to exit en masse) If you are going to start a dividend program – you had better keep with it. Repurchases can be viewed as – gee the management team thinks the company is undervalued. That of course is usually wrong – managements are usually too close and completely delusional about their own value – much to the detriment of stock repurchases. The cynical view has been expressed here – we’ve run out of ideas and aren’t willing to try new things – or fund higher risk projects that might pay off big. That’s a fair statement.6. Do as I do, not as I say. Look at the actions of Warren Buffet – considered the greatest investor of his generation. When he invests in a company – he truly looks on it s a fractional ownership of the whole company. Thus, if any of his companies have the capability – he encourages them to repurchase stock hand over fist. Yet, when you look at his own company, Berkshire Hathaway – he has never repurchased stock. He doesn’t split the stock – he doesn’t pay a dividend – he just piles up cash to make more investments. I think I would take his advice!
Buffet is a good base line from which to evaluate actions but he often is a paradox. Buffet invests in stuff he can understand — furniture, railroads, insurance, Coke, Dairy Queen, Net Jets (stinker) — and stuff which is already well managed with a bit of growth arguably in front of it.Stuff which he believes has a fundamental long term future and will not be overtaken and consumed by a new technology. Cheeseburgers are here forever.But at his core, he is effectively arbitraging his own PE v the PE of the acquired company.If his PE is higher than the acquisition multiple (private company) or the PE of the acquired company (public company), then the higher PE is propelling his stock price toward an upward bias.If his return on cash is lower than the acquisition PE, then the improvement in return is propelling hs stock price with the same upward bias.At the end of the day, it’s all just about capital allocation of both trade bait (stock) and cash and debt (the missing ingredient) — in the bank, in the stock and in the stock market.But fundamentally he is investing in things which he can understand, have no attendant management issues coming with them, have no real long term prospect of going away and which he can allocate capital to directly or through arbitrage or through use of debt to create an upward bias for his stock.It is the elegant simplicity of his thinking which is his genius and the benefits of 70 years of compound interest.
Sorry for the late comment but I was catching up:”But at his core, he is effectively arbitraging his own PE v the PE of the acquired company.If his PE is higher than the acquisition multiple (private company) or the PE of the acquired company (public company), then the higher PE is propelling his stock price toward an upward bias.If his return on cash is lower than the acquisition PE, then the improvement in return is propelling hs stock price with the same upward bias.”This is 100% right. Its why I could never understand “goodwill” accounting. If my PE is 50 and yours is 5 and it is sustainable I can pay you twice your current value and for every dollar of E you have I can increase my P by four times your E. What is not to like??? Chambers and Cisco were the best at this IMHO.
Fred, when I think of stock buybacks, I really come back to Henry Singleton who started Teledyne. I think most people agree that he is perhaps the greatest capital allocator in American history — even Buffett uses him as an example.With public companies, when you have excess capital you can do a few things – 1. Go out and do deals. 2. Give a dividend. 3. Buyback stock.Singleton did a lot of 1 and 3. Teledyne started out as a VC backed manufacturer of electronics to bet on the coming digital age and really evolved – in 10 years he bought over 125 different companies. Some very outside of technology — for example they ran a big successful insurance company. Often what he did was use his stock when it was overvalued as currency for doing these deals. It was a highly successful strategy.Then, when his stock was getting clobbered, he usually did 3 and bought back stock.Singleton went out and did deals when they were priced well and I think that is a problem. A lot of times in the M&A process things get undisciplined and the acquirer ends up wastefully spending capital on deals that don’t add value.So maybe RIMM looked around and decided there just wasn’t anything worth buying. I’m sure if something came up they would go and buy it. For some companies I think it is really tough to foster innovation which translates to the bottom line for shareholders. Some might not have the culture for it. Apple is a great case of this working just fine – but I can look across tech and name companies that really should be something else besides bleeding FCF on acquisitions at rich prices that only add value to the investment bankers doing the deal.
In this market, with their holdings, there are always things worth acquiring for a company like RIMM. They are a one trick pony(email) and really need to diversify their handsets to avoid being outpaced by the competition. I just think that they don’t know what to do at this point, they don’t think they can beat Apple and they aren’t committed to being as dynamic as Google. There is only so long that a perceived uninspired email machine can keep pace with new and shiny on the strength of doing its one trick very well.In short: RIMM is badly in need of consumer-side flash. They should have used some of that money to buy PALM and WebOS.
Fred, RIM is a victim of its own success… as the company grew its finger became removed from its innovation pulse (the key to its success) and landed on that of the public markets. Satisfying the appetites of analysts estimates became its core function and with this innovation lagged, opening the doors for its competitors. As a result of the competition and its sluggish innovation there have been downward pressure on RIM’s stock causing them to be backed on their heels and forced into a totally defensive position. The buyback is merely another move to counter the punches of its competitors namely: Apple and Google and prevent a knock-out blow.
Maybe this is a bigger question for a different day but why would anyone want to go public? The only answers I have come up with is two: 1) reward shareholders in a private company that has growth opportunities beyond selling out and thus could use the money raised to further fuel growth and 2) ego. It seems like such a hassle in so many ways. The scrutiny, Sarbanes-Oxley, the legal fees and paperwork, the short-term thinking that goes with quarterly reports. Since I have never worked for a public company for more than 3 months, I am honestly asking this question?I can’t help but wonder if there was an alternative way for start-ups to generate money at that level, like the equity exchange ideas that have been discussed here in the past, why anyone would actually go public anymore?
Like any financial transaction, it is the context and the ACTUAL situation the company finds itself in rather than a broad generalization which provides insight into the wisdom of any specific buyback program.I am a huge fan of stock buybacks when executed with a specific financial goal or motivation.Buybacks are like mustard — everybody has their own favorite flavor and when YOU say “mustard” you may mean a stone ground mustard w/ just a bit of horseradish thrown in and I may mean Gulden’s Brown Mustard (Batampte, of course is my personal favorite as I am a sucker for tumeric).First, it is important to look at any capital transaction as it relates to the capital structure of the company in some specific detail. The following info is the minimum you will need to know BEFORE you even start thinking about repurchasing any shares.Total shares authorizedTotal shares issuedTotal shares outstandingShares held in TreasuryOptions outstandingOptions “in the money”You have to decide how many shares, at what target price and most importantly — what are you actually going to do w/ them AFTER you buy them back?If you are able to use shares as trade bait to do deals and you don’t want to dilute your existing shareholders by issuing more shares, then a buyback may be a legitimate way to do deals, husband cash and avoid dilution. This is effectively a GROWTH strategy and a fairly aggressive methodology.If you have options which are “in the money” and expect to have to deliver shares to option exercisers in the future and your share price is even trending upward, buying shares in the market and holding them in reserve for option fulfillment is an anti-dilutive strategy.If you are simply going to buy shares, reduce cash thereby and “retire” them — not hold them in the treasury for future use — then this is also anti-dilutive but gives rise to the issue of what you think the future prospects are for the company? It is really an action that should be viewed with an M & A lens.When Exxon bought Mobil, they effectively drilled for oil on Wall Street. Think about that for a second. They bought reserves more cheaply in an M & A context than at the end of a drill bit.When you buy back your own shares you are effectively purchasing a company — your company — with some reasoned assessment of future value. Don’t be afraid of this line of reasoning.If you cannot find a better use for your cash other than buying back your own shares or if your conviction as to future prospects is so compelling then by all means invest in the best deal you can find — your own company.In some ways, if you were convinced your future prospects were so reasonably positive and you failed to buy back your own shares — shame on you.Sorry for the length.
Well said JLM. I also used the oil reserves example in my comment. It is probably the most common/obvious analogy.
This is an excellent complement to Fred’s post. Thanks for taking the time to write it
We need an email this comment button. I need to email this comment to someone.
Fortunately, even the iPhone has copy and paste now. 😉
In an odd twist of fate, I have a broken Blackberry in for repairs.
Great Post… agree on you sentiments exactly.
I missed this by commenting too soon after Fred’s post. Luckily I caught it at your defacto blog http://Disqus.com/JLMDrilling for oil more efficiently on wall street, certainly an M&A mystery to me. I guess it’s always a question of what’s the best future value for my current cash with consideration for all the other things we chew on here (diversification, risk).With Fred’s post today on puts and shorts it makes me think about shorting the dollar given current trends (gold, real estate, etc).
BTW, Fred, what a world class experience being the COB of TheStreet.com. Huge. I would love to hear the story of that madman from Rumson some time.
I don’t want to tell tales about my experience working with Jim. He is a challenging person in many ways but also brilliant. He was the first blogger I ever met. I learned so much from him. I copied the Gotham Gal move from his use of the name Trading Godess for his then wife Karen, who is also an amazing person
Buyback aside, I wouldn’t discount RIM just yet. They are an innovative company and they are spending lots of time and money on new products and technology. They just don’t hype the ideas before its time, like others in the market place.
I always have viewed a stock buyback as a signal that the company it under-performing in the innovation department.That said, I think it is a responsible thing to do if management can’t adequately invest my capital in innovative projects. Giving me my money back is a good thing.The different take I have is that I’d take the money and run: to invest it in a company that needed the cash so that they could change the world.
I think that a Stock Buyback is a pretty humble action. With all of the options above, Management is saying the best thing to do with the money we have is to return it to our shareholders, allowing those shareholders to then diversify their holdings as you wrote about this week.Having said that, it is also a clear signal that Management doesn’t have any ideas that it believes in that will move the company forward. I don’t think that there is any clearer signal that it is time to make a change in Management. That is not to say that Management is bad, they just don’t have anything new to bring to the table that they believe in. Perhaps they will be more inspirational and passionate in another business, just not this one.In this specific example, RIM led the smart phone market for years. Every business person “had” to have a blackberry. It was how people stayed connected when they were on the go, and even when they were in the office but not at their desk. RIM has been passed by Apple and now by Google with the iPhone and Android. So, I think what we can say about yesterday’s announcement is that it is time for Management to go, or for Rim to sell, or for something to happen because RIM has now started down the slippery slope of “not mattering” just as Palm did before them.
Stock buyback is good for companies whose growth cannot exceed 10% in an year. Traditionally they fall into old economy industries like rail roads, retail etc.,But for others especially in the technology industry, stock buyback is just so lame. It clearly shows lack of ideas and the company will pay dearly in the future for this decision.
Well… what if the company has no investment opportunity and no need for the cash? I am not saying that is the case of RIM, what i am saying is that the money is from the investors and stock buy backs can be a great way to give it back with lower taxation!
Years ago I had the benefit of working with several companies associated with Bill Stiritz. He’s known for such companies as Ralston Purina, Ralcorp, Energizer, Vail Resorts and Agribrands. A great corporate manager and investor.He’d always say he didn’t like buybacks, in contrast to dividends, because his point of view was, why should he reward shareholders who want an exit? If a company wants to return cash to shareholders, it should reward the long-term shareholders by paying a dividend.
WHAT???Sorry to say it, but this is a ridiculous post. The only reason to own equity in a corporation is such that you might participate in the profits of the business. There are only two ways in which you can access profits as a public shareholder. Dividend or stock buyback. A stock buyback is more tax efficient for the shareholder.Companies are supposed to be profitable. A stock buyback is simply a recognition that shareholders should get to decide how to reinvest THEIR profits. One of Warren Buffet’s most important criteria for investing is the existence of a stock buyback program.You were probably right about the TS.com, but the analogy doesn’t apply to RIM whatsoever (or any company with a real business and a reason to be a public company).
hmmh… now that qualified dividends are taxed at 15% (less or 0 if you’re in 15% and under tax bracket, I think) – why would buybacks be more tax efficient?
Dividend is a taxable event at the time of dividend (qualified or not).The effective gain in a share repurchase is only taxable when an investor sells.Over the long run, the latter allows you to get compounded returns on pre-tax dollars whereas the former doesn’t.
I think you’re comparing giving cash back to shareholders vs. not giving it back and reinvesting cash flows in the business.If the company is giving cash back to shareholders and comparing a dividend vs. a buyback: Suppose a stockholder had a 100 shares at $100. The company pays $1/share dividend. Investor gets $100, pays $15 tax. Suppose instead the company buys back 1 share at $100. Investor pays 15% on his capital gain, if any. So yes, the buyback will always incur less tax. The advantage is less than in the old days when the dividend was taxed as personal income, but still there.
Sorry to say it but this is a ridiculous comment. You participate in the earnings by virtue of cash building up in the business and the market’s recognition of the company’s enhanced earnings power which is reflected in the reported earnings and multiple applied by investors who will purchase your stock at a higher pricePlus starting off a comment with an inflammatory assault on me is not nice
Hey, agree to disagree. IMO the whole system depends on the implicit eventuality that an investor will someday get access to those profits. If you remove that assumption, the story swiftly unravels.If you look at it in that regard, Rimm is simply making good on that promise.sorry about the AVC etiquette, I wasn’t looking to be offensive.
that is the assumptionit can happen with dividends, and even liquidation at some pointyou don’t need stock buybacks at all to make it happen
Man I like posts like this! The comments add so much, JLM and Tariq much thanks.
It’s not correct that the CEOs should only raise capital and never return it to shareholders.Companies go through cycles where they consume cash, ie building the business, and generate cash, ie when they’re mature. At different times, different balance sheets give the best return to shareholders – sometimes it’s good to have a fortress balance sheet, and sometimes shareholders are better off if you substitute debt for equity and take advantage of cheap leverage to juice returns. (although I guess Modigliano-Miller would argue otherwise)It’s true that the job of a public company CEO is to know how to allocate capital and find ways to grow. But they know that – telling them to grow their empires as opposed to returning cash is like telling boys it’s OK not to be virgins – they don’t need the encouragement.That being said, a common scenario is where a stock was a high flyer, and then falls by half, and the board says, we love the stock so much we’re buying it back here, and then it turns out the market was correctly predicting deteriorating fundamentals, the stock keeps falling, at which point they have to issue stock at low prices and dilute everyone because they depleted all the cash.Additionally, in the past dividends were taxed as ordinary income, so buying stock back and giving cash back as capital gains made more sense. But that is currently not the case.
I’m with you druce but if you have too much cash and will continue to cash flow, then pay a dividend. Become a cash yielding stock
on further review, what you said LOL … dividend is straightforward . For a buyback to benefit future shareholders more than a dividend would seem to require management to outsmart the market, not impossible but not a good assumption.
It might be nice if RIM decided to spend some money on fixing mac–blackberry syncing rather than doing stock buybacks.
Fred, I share your position on stock buybacks. Apple is sitting on a mountain of cash and could have spent some purchasing their own shares a year ago and done well. However, as a shareholder, I’m glad Apple is focused on generating shareholder value through innovative products and strong execution. It seems to be working.I have to say that I disagree with your perspective of RIM’s success. I stuck with Blackberries for 10 years because no other alternative could touch them when it came to Enterprise email. The device form-factor with the full qwerty keyboard and the complementary BES that delivered secure push email rescued us from those horrible touch-screen Palm Pilots and iPAQs! However, what has RIM done that is truly innovative since their original launch? I don’t see anything significant. In fact, what I do see are some failed attempts to break out of their niche with new devices and a me-too app store that the market has reacted to with a big yawn.I think RIM is out of ideas and the stock buyback is an admission of that. The company still has a solid product and a very valuable installed base, but they better get some fresh talent with fresh ideas quickly or they’re destined to become the new Palm.
awesome. lazy and i hate em. so many mutual fund and television yammering and debate about what is just ‘we dont have anything creative to make’
It would be one thing if they did a stock buyback after having done a few deals and having really wonderful comScore numbers about the state of mobile phones. Right now, they passed on the deal everyone wanted them to do *coughPALMcough* and they don’t seem as invested in new technologies for cell phones as say HTC.You are right, the stock buyback does make them seem lazy when you look at the facts in plain English. Why can’t they find something else to do with the money- in this case it looks like they do have no direction.
They don’t have any direction. They are a business company being overtaken by the glamour of consumer electronics. As I wrote elsewhere, RIMM is great at what they do, it just doesn’t look sexy compared to what others are doing in the space. They are the leaders but are losing in mindshare, buying stock won’t help that
To which I say: This too shall pass. They succumb to being ehh to sucks at consumer electronics, they focus on making a good product (it could happen), or they go back and make an even better business product. All of which is possible.Buying stock doesn’t help unless they have a secret plan that we don’t know about, I agree with that.
@Malcolm – I think it’s more an issue that RIM almost saturated the Enterprise market and Wall Street’s addiction to growth forced them to enter the consumer space. The core value that RIM offers is solid, but they seem unable to evolve and keep up. They’re in serious danger of becoming the new Palm, IMHO.If I were them, I’d focus hard on the Enterprise market and use that money they were planning to use to buy back shares to create an arm’s length subsidiary to fight the consumer war. I wouldn’t locate the subsidiary in Waterloo, Ontario, I’d spin it up in a more culturally compatible location.(BTW, it’s RIM, not RIMM. RIM = Research In Motion)
Great post Fred. Thanks.Coming from a tech company corporate development background, I feel like there are often good deals company can do with excess cash on the acquisition front. If you are willing to search diligently for the right deals (right technology, right people, right customers, right price, etc.) I think you can find very attractive ways to spend your money with a high likelihood of achieving your objectives.On the other hand, a stock buyback is a bit of a crapshoot – you can spend a lot of money, not achieve your objectives and not have much to show for it at the end of the day, all while sending the signal that you couldn’t think of anything better to do with your money.So, the better bet in my mind is doing deals.
“We just gave back a lot of cash to the investors”INCORRECT.You actually gave a lot of cash, that investors had on hand, to those who did NOT BELIEVE in the stock. In other words, you gave the cash to SELLERS. Considering everything, you probably wound up buying from those who borrowed to stock to sell it short …
Regarding this quote from Roger: “However, if a company has either (1) run out of good, high ROI projects to invest in or (2) has truly excess cash beyond the level at which it needs to comfortably operate, absorb market shocks and have excess to invest in high ROI projects, then it should return the money to shareholders. “Hmmm, the way to return money to SHAREHOLDERS is with a DIVIDEND …
You know, this just seems to be an opporuntity to speculate on what RIMM is trying to do.1) Go for cheaper margins- they seem to be aiming at young kids as the feature phone of choice (free text message with BBM is popular when I ask people about it on the train)2) Buyback the stock because they want to prepare their capital structure for something big like a bunch of purchases. it’s been mentioned here that most tech companies sit on huge capital reserves, it should be unlikely that they are going to be out of cash so fast.3) Admit that they are going ???? at the state of the mobile market, and want to wait it out so they know what to innovate in (A possibility, they are supposedly releasing a new OS soon based on Webkit)4) Turn into Palm I hope not.
As others have pointed out re Buffet’s approach to this: encouraging his portfolio companies to buy back but doesn’t practice this @ Berkshire. He explains the reasoning of the former nicely in the 1980 annual letter:”One usage of retained earnings we often greet with special enthusiasm when practiced by companies in which we have an investment interest is repurchase of their own shares. The reasoning is simple: if a fine business is selling in the market place for far less than intrinsic value, what more certain or more profitable utilization of capital can there be than significant enlargement of the interests of all owners at that bargain price? The competitive nature of corporate acquisition activity almost guarantees the payment of a full – frequently more than full price when a company buys the entire ownership of another enterprise. But the auction nature of security markets often allows finely-run companies the opportunity to purchase portions of their own businesses at a price under 50% of that needed to acquire the same earning power through the negotiated acquisition of another enterprise.”Source: http://everythingwarrenbuffett.blogspot.com/200…
Wow, Fred. That sure was an honest discussion about your experiences with TheStreet.com . Not many people would have the guts to write about such learning experiences like that.BTW, this is off-topic, but mentioning it since I think it may be of interest to many in the AVC community: just saw that Disqus has a new “comment thread migration tool”. It allows people who use Disqus on their blogs to migrate comment threads to a new domain if they shift their blog to a new domain. Good idea, and in line with the data portability initiatives, methinks … Their blog post about it is here:http://blog.disqus.com/post…- Vasudev
Fred- I agree that a buyback sends a negative signal. But let’s not think that M&A sends a positive one. Most tech M&A is value destroying (different platforms, human capital leaves, customers walk, etc). And this from an old corp dev guy…
As a director did you try to influence the board to use the cash for the great ideas that you can now see in hidnsight? What is wrong with giving the cash back to shareholders? They are the owners of the company and therefore by extension the owners of the cash. Isn’t possible that those owners can have great ideas on how to use the cash? Maybe invest in another company that does have good ideas about investing the cash or send their kids to college. As an observer I can see your frustration – as a participant there is a question as to whether you were doing your job.
Hi JimI wish I could go back to that time knowing what I know now. It was a challenging board and management situation. I learned a lot from that experience
Hello Fred, in additon to comment below from Rob K, to me it seems like your assumption/thinking was/is that thestreet.com could have done good acquisitions/projects -in a time of uncertainty- that would create value for shareholders, which possibly would have been the best option for the company itself (regardless of the outcome of those transactions) but not necessarily for the shareholders of the company.And I believe that has a lot to do with that specific experience/case so hard to generalize, nevertheless great insight and discussion about it, first time I have seen such great content on comments section of a blog:)
we have a great community here at AVCit is really an inspiration to meit is why i keep writiing
This is one of those posts that will generate a lot of great discussion and bring in a lot of people who otherwise sit out.
It can make sense for a growth company to buy back stock if there is a large tranche of employee options about to be exercised.
$RIMM is 61% institutionaly owned. Institutions don’t want to deal with dividend reinvesting. They want to unload their shares.
Not sure if these buybacks make a lot of sense in today’s market. I think investing in your technologies in a safer bet, while subjecting the company to less market risk. Guess that’s why CEOs make big bucks…to make these decisions.
Fred, you posted on KPI’s a few weeks back. Wonder what RIM’s R&D% v revenue looks like versus Nokia’s, HTC’s, Moto’s and Apple’s. Anecdotally it would be interesting to have Palm’s too.
It’s very simple. If your the stock value is cheap and you can’t employ the capital otherwise, then a stock buy back is a good use of money.The main problem with stock buybacks is that insiders use them to artificially pump up the price of their shares, and therefore increase the value of their stock options. So the insiders have an incentive to buy back stock to increase the stock price and increase their option values.
I’ve also seen stock buybacks occur to re-boost market cap. CEO’s panic when their market cap goes down as it makes them easier acquisition targets, so theoretically a stock buyback would help market cap.
I share part of your doubts about the interest of buybacks. But I believe that most of stock markets investors neither have a so clear idea of a company strategy (ie. information assymetry theory and reality) as you mention, nor they have such a neutrality that they can make a clean sweep of their propensity to choose opportunism (in this case, stock selling).The other question may be : is there just a handful of smart investors on the stock markets (and plenty of followers) or really tons of visionnary investors well informed ?
I share part of your doubts about the interest of buybacks. But I believe that most of stock markets investors neither have a so clear idea of a company strategy (ie. information assymetry theory and reality) as you mention, nor they have such a neutrality that they can make a clean sweep of their propensity to choose opportunism (in this case, stock selling).The other question may be : is there just a handful of smart investors on the stock markets (and plenty of followers) or really tons of visionnary investors well informed ?
I’m curious for people’s thoughts — I’m not well versed in the pros/cons of stock buy-back but would a stock buy-back make it easier to sell the company?Here is where I am going with this: If you ask me, I think RIMM is ripe for acquisition even pre-buyback and MSFT is desperate for a solution to their mobile needs. Looking at synergies and cost/value to MSFT I would be willing to bet MSFT may be coming after RIMM shortly. MSFT doesn’t need the cash and any acquirer of that size would be buying the market-share, not cash anyway. Maybe they have decided they want to position themselves for a sale…that is, if buybacks help make it an easier thing to do (less shareholders, in theory true value investors, etc).
This incident has several characteristics that may not exist in our buyback situations, and hence all buybacks may not be bad. In this case macro-economic fundamentals were against value-creation for investors. The entire high-tech industry was in midst of a deep recession (bubble burst). So any gain from the buyback program was more than offset by negative investor sentiment about the sector and hence about the company. This incident, however, does not make all buybacks an unfavorable option.
The actual example used might not be the best example to make the point.TSCM bought back shares at $1. Then, several years later, they sold almost $60mm worth of shares at $14.25. This was very savvy on their part. Buying stock when it was undervalued (trading below cash) and selling when it was overvalued (the stock is around $3 now). Its hard to find examples of buybacks that produced a better result than this one.
yeah, but what did any of that do for the company?the company has a market cap of less than $100mm todaythat is more or less than the cash we raised in the initial IPOwe never made the investment to build a lasting strong business therethat is the mistakeyou can focus on stock transactions or you can invest and build a businessi’d prefer the latter
I agree building a business is better. But just in this example they made a lot of money on their stock transactions. There are worse things than that. They’d probably have a $10mm market cap today instead of $100mm if they had not done that.
makes sensethat is what Jim is great at
I agree with you that rather than the company using excess cash to buyback stock they hyer a chap like you were, find an unused space and let you have a go at it. “It” being whatever. Sure there would be a time and expense limit. I remember as an example Zenith and the development of the cobra arm phonograph.
What are the different view points when a company buys back stock from its institutional investors and at a higher price than the market value? If institutional investors want exit they can always do an open mkt transaction. I fail to understand why a company would do that unless the company management wants to give sweet exit to its institutional investors at the expense of common investors and employees and the company itself.
Good post, with a caveat – it depends a lot on where the company is in its development cycle. I hate buy backs for early stage companies and not just stock. A number of years ago prior to the tech bubble, CBS Sportsline went out and issued a convertible preferred that traded at a significant discount to its conversion price ( I think the stock was at 40 and the conversion price was at 30 and the bonds traded at 70 , ie deep in the money as you were effectively able to buy a stock trading at $40 for $21 through the bonds). The board decided that the best use of cash was to buy in the convert. Eight months later, the company hit a wall and needed cash, so after carefully expanding an equity base and strengthening its capital structure through a number of issuances, the buy back had effectively wiped out the underwriting efforts of the previous years, weakened the underpinnings of the company, and shrunk the float (which increased the volatility). This was not pretty and a classic case of the law of unintended consequences.Buy backs work great for big companies. Viacom for example is clearly seeking to shrink its share base and boost returns as the company has excess cash, the board thinks the stock is too cheap and can’t find a lot of places to play in M&A land. The point is that stock buy backs can be an effective tool, but must always (IMHO) take second place to investing in the business and boosting revenues and returns.
current INSEAD student here: Just wanted to share that academia looks on buybacks as a source of internal corporate knowledge which can be used to beat the market: http://tv.insead.edu/video/Most+Recent/100/35538http://knowledge.insead.edu/finance-buybacks-an…
a late comment, but i’ve been contemplating this. yhoo announced a $3B buyback today. this event aside, i think there are many signs pointing towards a lack of clarity for management to ignite growth at yahoo. sometimes choice a (invest cash) is avoided because management has not found the right investments. so you go to choice b (return cash). maybe this is a good choice if the only choices were choice a and choice b.sometimes choice c is the best choice – but it can only be made by boards when it comes to public companies – and they are very reluctant to make this choice. choice c = find leadership who can use cash and other resources continue to build long-term shareholder value ..