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Technology Stocks : Citrix Systems (CTXS) -- Ignore unavailable to you. Want to Upgrade?

To: MikeM54321 who wrote (6670)	6/11/1999 9:31:00 AM
From: Biomaven	Respond to of 9068

MikeM, The calculation you do under FAS 128 to determine whether convertible debentures are dilutive is you compare basic EPS (doesn't include any dilution from the debentures) with the EPS you get if you assume the debentures are converted but you add back the debenture interest payments to earnings. If the second number is less, then the debentures are viewed as dilutive and included in diluted EPS (after again subtracting the interest payments). As these are zero coupon bonds, I guess they used the imputed interest rate in doing the calculation. A share buyback would reduce both the shares outstanding at the end of the period (by the full amount of the repurchase) and the basic/diluted shares outstanding for the period (by a lesser amount, depending on when in the period the repurchase occurred). Thus if the repurchase happened on the last day of the period, it would have essentially no effect on the basic outstanding for the period, but if it occurred at the beginning of the period it would reduce the basic outstanding for the period by the full amount of the repurchase. Peter

To: MikeM54321 who wrote (6670)	6/11/1999 11:51:00 AM
From: Chuzzlewit	Read Replies (2) \| Respond to of 9068

Mike you noted: Secondly, what do you make of CTXS doing a convertible offering raising around $300 million, then turning right around and authorizing a share buyback of $200 million? Not that I'm saying anything is wrong with it, but the timing is unusual. In your opinion would a company actually plan for this type of transaction? If so, you would have thought that they wouldn't have done a "convertible," right? First, let me start with one financial facts of life: a share repurchase is a tax advantaged dividend in disguise. Were taxes not an issue, shareholders would get the same benefit by using the $200 million to purchase additional shares. But since the company is doing it for them the "dividend" is tax-deferred, and when the share holder eventually sells it is treated as a capital gain rather than ordinary income. So now, the question that needs to be asked is why did the company authorize a dividend (in the form of a share repurchase) at all? In general, a company ought to be investing its cash in productive assets. In the case of CTXS I would think that this ought to be in the form of software development investments. In general terms, a company ought to dividend cash to shareholders when no financially feasible investments are available. This approach is called the "residual dividend" policy. Thus, the fact that the company decided to expend $200 million for share repurchase raises a question in my mind as to whether this is the best use of cash. Next, the company issues debt with a face value of around $300 MM. Now this would be alright, because in effect the company would have simply made the decision to leverage itself -- issue debt and use the proceeds to buy stock. The sticking point is the fact that they used convertible debt to accomplish the leverage. This begins to smack of financial engineering. The reason is that if the price of the stock is below the conversion price trigger then the extra shares that would be counted by dilution won't appear on a fully diluted basis. They will appear only if the price of the stock is above the trigger. And in that case, on a fully diluted basis the accumulated interest will be backed out of the computation (remember, these are zero coupon bonds), which will raise the total earnings. TTFN, CTC