How Execs Earn Sweet Fees on Buybacks (#2) - Nvidia Case Study

20 Pages Posted: 22 Jun 2007 Last revised: 21 Apr 2009

Date Written: June 14, 2007

Abstract

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

Gumport, Michael A., How Execs Earn Sweet Fees on Buybacks (#2) - Nvidia Case Study (June 14, 2007). Available at SSRN: https://ssrn.com/abstract=993964 or http://dx.doi.org/10.2139/ssrn.993964

Michael A. Gumport (Contact Author)

MG Holdings/SIP ( email )

Summit, NJ 07901
United States

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