NVIDIA's $14.5 Billion Finance Director - A Cashless Buyback™ Case Study
26 Pages Posted: 1 Jun 2016
Date Written: May 30, 2016
Imagine – elevators carried passengers down only – cars drove just in reverse. As a former venture semiconductor CFO, I know firsthand that steering strategic finance through tough times is like going against traffic on a one-way street. The point is, a CFO has plenty of levers to pull when a company’s shares are fully valued, but, when managing an undervalued firm, what can a CFO do? What maneuvers make sense?
A Cashless Buyback™ is the answer. In dealing with corporate undervaluation, it is, for equity finance – an up elevator – an advancing vehicle devouring an open road – a minimal cost/minimal risk transaction that offers a corporation high upside, benefits investors, and contributes to capital market efficiency.
A Cashless Buyback™ sets before a CFO a proposition in the following general form:
“Your firm now has an equity valuation of $1.000 billion with 100 million shares outstanding trading at $10.00 apiece. If your company’s stock price can hit a $22.00 target within 7 years, then, by putting in place a Cashless Buyback™ today, your firm positions itself, as soon as it achieves the target, either to a) receive a $2.000 billion, tax-free, cash, ‘bonus equity’ payment with no change in share count or b) retire 47.6 million shares at zero cost. In any case, trading volume in your firm’s shares will increase, ownership broaden, short interest will be eliminated, and your firm’s access to equity capital markets will improve. If you miss the target, there is no penalty – no cash outflow, no dilution, no debt burden. The transaction carries no counterparty risk.”
Cashless Buyback™ terms are so far off the beaten track of pedestrian financial expectations that they sound like anti-gravity or a perpetual motion machine. They stretch the limits of what conventional wisdom deems possible. So, no one should blame CFO’s and their teams, paid for prudence, for being skeptical when presented with Cashless Buyback™ proposals.
Still, NVIDIA’s Finance Director rejected out of hand any serious consideration of a Cashless Buyback™. His closed-minded attitude cost NVIDIA $14.5 billion. Perhaps his knee-jerk response reflected the finance profession’s past misadventures with novel instruments (LYON’s, ARS’s in particular, and now, possibly, ASR’s). Whatever. Without blame or judgment, his inaction is a relevant teaching moment. The enormous size of NVIDIA’s opportunity cost should inspire in others clear, clinical, reasoned due diligence in evaluating the components of a Cashless Buyback™.
Keywords: Cashless Buyback, NVIDIA, NVDA, LYON, ARS, ASR
JEL Classification: G24, G30, G31, G32, G35
Suggested Citation: Suggested Citation