So when does this "merger" complete and Novell can start buying back some of this stock?
Tech Company Stock Buybacks May Be Savvy
April 28, 2001 2:25 pm EST
By Timna Tanners
LOS ANGELES (Reuters) - Investors aren't the only ones snatching up cheap technology stocks, betting that share prices have hit bottom and counting on big returns once the market recovers.
Among top names in technology, International Business Machines Corp. (IBM.N) this week announced it would buy back up to $3.5 billion of its own stock and Oracle Corp. (ORCL.O) said it would buy up to $3 billion of its stock.
Share buyback programs are nothing new, but experts say the time may be ripe for some cash-rich companies to send a message to the market that they have confidence in their own business.
If the downturn in technology stocks has indeed ended, as some analysts believe, these companies also could stand to make tidy profits on their investment.
"The main reason for this trend is that their stocks are depressed, so it represents a good value for companies to retire shares," Peter Rogers, head of research at WR Hambrecht & Co. "You always see share buybacks in market corrections."
With many technology stocks and the tech-heavy Nasdaq near annual lows, share repurchases are a solid way for companies to show the market they are so convinced their stock will recover, they'll sink their own cash into the shares.
Companies buying many of their shares can also boost the value of their stock, as strong demand tends to create at least a short-term uptick in share prices. With fewer shares in the market and equivalent market demand, stock prices should rise."It's a way to enhance value to the shareholders who stick with you," Harvard Business School finance professor Samuel Hayes said.
Plus, a smaller number of shares outstanding means that equivalent earnings will look larger in terms of earnings per share. Companies such as IBM and Microsoft Corp. (MSFT.O) are known for repurchasing stock and taking other measures to enhance the closely watched earnings per share values, analysts said.
A SIGNAL OF HEALTH, EXTRA CASH
Amid a flurry of layoff and bankruptcy announcements, technology companies are eager to distinguish themselves as outside the fray. Announcing a share buyback plan shows the market the company is confident in its long-term business and has enough spare cash for the transaction. "I think 90 percent of it now is signaling," said Pip Coburn, global technology strategy analyst with UBS Warburg. "I think tech companies are trying to give some ray of hope that the long-term future is still very, very positive."
For example, headset maker Plantronics (PLT.N) in February announced a buyback of up to 1 million shares after its stock lost half its value in three weeks. "Our board of directors believes that Plantronics stock presents an attractive investment for the company and its stockholders," Plantronics Chief Financial Officer Barbara Scherer said in a statement.
Similarly, Texas Instruments Inc. (TXN.N), the world's No. 1 mobile phone chip maker, announced a 17 million share buyback program on April 18, the day after it said it would lay off 2,500 employees. That buyback would total $650.25 million as of that day's closing share price.
After Internet companies failed to post the exponential growth expected of them and a weaker economy crippled technology stocks, executives are eager to persuade investors their long-term growth models remains intact.
"When you do a projection of recovered earnings levels, (this) is seen as a cheap price to pay for the future level of earnings expected from the stock," Harvard's Hayes said.
UNSPENT CASH
Yet a still soft market for their products and services in the near-term has left many technology companies with unspent cash, as rapid expansion plans are curtailed or postponed. "Companies may find rather than building additional capacity that they won't be able to use for several years, they may be better off buying shares," Hayes said.
Some companies have attributed their buyback program to a need to have shares on hand for employee incentive programs, such as stock option and employee stock purchase plans.
Oracle, which had nearly $5 billion in cash and short-term investments at the end of Feb. 28, said its stock repurchase plan was intended to offset the dilution of shares distributed to employees. IBM had $3.87 billion in cash, cash equivalents and marketable securities at the end of March.
Microsoft, which had about $30 billion in cash as of March 31, restarted a buyback program last August, with purchases based on the level of stock options among many of its 40,000 employees. The company has not revealed how much it spends buying back its own shares or how many options it grants, but it has some 5.56 billion diluted shares outstanding, compared with 5.54 billion a year ago.
Still, buyback programs are not necessarily a guarantee that companies will actually buy back shares.
Often companies say their board approved a share buyback program and set a target amount in share or dollar terms. But they are under no obligation to buy shares. UBS Warburg's Coburn said 80 percent to 90 percent of stock buyback announcements will be viewed as neutral to positive, noting that the market would not look favorably at highly leveraged companies or firms that have to borrow money to buy back shares.
"In this environment it's one thing for Oracle and IBM, who have cash-rich balance sheets," said WR Hambrecht's Rogers. "But there's only a select group of company that can do this." |
