Data: Comparing Stock Buybacks (#8) Plus Cisco Case Study
42 Pages Posted: 10 Jul 2007
Date Written: July 8, 2007
When corporate stock buybacks are executed, boards normally permit ongoing stockholders to labor under the impression that the action is undertaken for their benefit and is a tool to capitalize on undervaluation. However, shareholder cash used for buybacks rather than for reinvestment or dividends increases the ownership stake of management (and employee) options. As a result, interests of shareholders and option holders diverge when buybacks are undertaken. From the option holder's perspective, the reason to do a share buyback is simple: The option holder benefits almost regardless of valuation.
A Cisco 2004-2007 case study (eighth in a series) quantifies buybacks' skewed returns in favor of management options. Cisco spends $29.9 billion to repurchase 19.2% of its shares. The direct result is a $1.27 (4.7%) pretax benefit per share versus securing a $5.46 benefit per option. Notably, Cisco's option pool (equal to 23.8% of outstanding shares) is unusually large, and 58.0% of Cisco's buyback is offset by stock sales.
The Cisco case is similar to previous studies in the series: 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 presented comparative analysis of buybacks by eight companies will be extended to cover an entire industry. The data should assist boards in adhering to governance best practices when weighing the competing interests of shareholders and option holders in buybacks and aid shareholders in their assessment of a buyback's purpose and outcome.
Keywords: 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, management options, governance, payout, dividend, 10b5-1, 10b-18 ,capital structure
JEL Classification: G30, G32, G35
Suggested Citation: Suggested Citation