Comparing Stock Buybacks (#9) + Synopsys Case Study
42 Pages Posted: 19 Jul 2007
Date Written: July 13, 2007
Shareholder interests diverge from management (and employee) option holders' on use of corporate cash for reinvestment, dividends, and buybacks. If options equal 25% of shares, shareholders/option holders in theory "contract" to split future stock profits 80/20. Dividends, however, escape the contract and are paid exclusively to shareholders. To "solve" the dividend "dilemma", corporations favor buybacks. Yet, buybacks tilt returns, too, but in favor of option holders.
A Synopsys 2004-2007 case study quantifies buybacks' skewed returns in favor of management options. Synopsys' relatively large option pool (25.8% of outstanding shares) suggests future stock profits will be split 79/21 between shareholders and option holders. However, Synopsys decides to do a buyback rather than reinvest cash or pay a dividend. The company spends $0.8 billion to repurchase 19.3% of its shares. The result is a $0.60 (2.3%) pretax benefit per share ($0.087 billion) versus securing a $5.24 benefit per option ($0.194 billion), i.e. a 31/69 split in favor of option holders. 54.8% of Synopsys' buyback is offset by stock issuances, principally for compensation.
The Synopsys case is ninth in a series and similar to previous studies: Buyback return measures are discussed, "absolute accretion" is presented as a preferred measure, divergent returns to shareholders and option holders are calculated, and a buyback comparative analysis framework is expanded. Ideally, the analysis will be extended to cover an entire industry to assist boards in adhering to governance best practices and shareholders in assessing the likely purpose and outcome of buybacks.
Keywords: Synopsys, SNPS, Cisco, CSCO, Xilinx, Applied Materials, AMAT, Symantec, Symc, Oracle, ORCL,Texas Instruments,TXN, Intel, INTC, NVIDIA, NVDA, stock buyback, stock repurchase, share buyback, share repurchase, option compensation, governance, payout, dividend, 10b5-1, 10b-18, capital structure
JEL Classification: G3, G30, G32, G35
Suggested Citation: Suggested Citation