Analyzing Stock Buyback Board Decisions (#4) - Oracle Case Study
29 Pages Posted: 22 Jun 2007 Last revised: 21 Apr 2009
Date Written: June 20, 2007
The author advocates buybacks as a means to capitalize on undervaluation, but, in combination with option plans, buybacks may have unintended consequences. A case study of Oracle's 2004-2007 buybacks extends a series that analyzes the division in buyback benefits between shareholders and management options. In the Oracle case, the company spends $6.4 billion to repurchase 8.0% of its outstanding shares. The stock subsequently rises 39.8%. Oracle shareholders benefit by $0.41 (2.1%) before tax due to the direct effect of the buyback; Oracle executives (and employees) with options benefit by up to $1.59 per option.
The Oracle case is similar to previous studies of Intel, Texas Instruments and NVIDIA. Alternative buyback return measurements are discussed, "absolute accretion" is presented as a preferred measure, and the divergent returns to shareholders and option holders due to payout decisions is quantified. It is observed that management options "earn" hedge fund type "2/20" fees for "work" on buybacks.
The current study also provides a draft framework for comparative analysis of one buyback versus another in order for boards to assure conformance to best practices and for shareholders to better assess a buyback's possible results. Ideally, the data will be expanded to cover an entire industry. If so, boards would better be able to judge normative compensation standards, and shareholders would better be able to judge whether they or option holders will be the primary beneficiary of a buyback announcement.
Keywords: Oracle, ORCL, Texas Instruments, TXN, Intel, INTC, NVIDIA, NVDA, stock buyback, stock repurchase, share buyback, share repurchase, option compensation, management options, governance, payout, dividend, 10b5-1, 10b-18
JEL Classification: G12, G30, G32, G35, J33, M41
Suggested Citation: Suggested Citation