How Execs Earn Sweet Fees on Buybacks (#2) - Nvidia Case Study
20 Pages Posted: 22 Jun 2007 Last revised: 17 Aug 2023
Date Written: June 14, 2007
Absolute analysis of accretion is a definitive measure of a buyback's contribution to shareholder wealth. In a case study of a world class corporation, NVIDIA spends $0.6 billion to repurchase 8.0% of its outstanding shares. The stock subsequently rises 90.1%. Absolute analysis shows ongoing NVIDIA shareholders benefit by $1.35 (3.8%) before tax considerations due to the direct effect of the buyback; managers benefit by up to $2.96 per option. Management option holders receive 30.9% of the buyback's stock price appreciation, akin to a "1.7/20" hedge fund fee structure for executive option holders. The small shareholder benefit, large gain for options, and sizable trading activity beg the questions: Should shareholder returns on buybacks be reported? Do benefits adequately compensate for 10b-18, 10b5-1, insider trading and option compensation governance liabilities?
Keywords: Stock Buyback, Stock Repurchase, Share Buyback, Share Repurchase, NVIDIA, NVDA, Texas Instruments, TXN, option compensation, management options, governance, 10b5-1, 10b-18
JEL Classification: G12, G30, G32, G35, J33, M41
Suggested Citation: Suggested Citation