Comments

• Shane Coyle

  2007-05-26 04:09:02

  A bit about buybacks for those of us who are finance-impaired (me):

  Buy-backs are intended to give investors increased confidence. The logic goes something like this: if a company buys back its own stock, the share price should go up - first, there are fewer shares outstanding after the buy-back so each share represents a greater portion of the company’s total equity, and second, with fewer shares outstanding the company’s earnings per share and book value per share figures should look more attractive, which might have a positive effect on the stock. A buy-back is also said to counteract the dilutive nature of employee share incentive schemes. But buy-backs do not always result in the share price going up. For one thing, the company has had to spend some of its cash reserves - which really belong to the shareholders anyway. While the buy-back seems to counteract the dilutive effect of employee stock options, all companies are really doing is transferring the problem: the dilutive effect of the employee share incentive schemes is now directly visible on its balance sheet where that huge pot of cash used to be. But just as importantly, by definition buying back stock means that the company feels there is no better way of using that cash reserve than ploughing it into the stock markets to buy its own shares - it does not feel that investing that cash in additional personnel, assets, intellectual property, or even other businesses would be a better use of that money. For some, it could be seen as the last desperate measure of a management team which has run out of inspiration.