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Technology Stocks : Wind River going up, up, up! -- Ignore unavailable to you. Want to Upgrade?

To: Allen Benn who wrote (3423)	7/17/1998 2:21:00 PM
From: Pirah Naman	Read Replies (1) \| Respond to of 10309

You are confused about this. Not in the least. There is nothing evil or wrong about repurchasing stock if Never said or suggested that there was. But as I joked in my last post, this kind of response is something I would expect from a politician looking to polarize an issue.

To: Allen Benn who wrote (3423)	7/17/1998 7:20:00 PM
From: Pirah Naman	Read Replies (2) \| Respond to of 10309

OT to start: when I logged back on and re-read my last post, it struck me as being rude. I'd like to apologize for that. I should have reviewed before posting. I'm sorry. Back on topic. any company that can afford the investment should repurchase stock if the stock is expected to outperform alternative investments. That includes investment in the business. WIND is in a unique situation (for a smaller company) in having gone the route of leverage. Many (most?) smaller, rapidly growing companies do not generate so much free cash from operations that they can not profitably invest it in the business. (And in fact, let's bear in mind that the cash pile at WIND mostly did not come from operations.) They have fewer options. WIND is now in a unique situation, their capital allocation decisions may be reflecting this, and it is quite reasonable that we should ask for, and receive, explanations pertaining to those. For those who only read in black and white: that isn't second guessing. Part of investing is understanding, and without understanding you are only speculating. With a program of stock buybacks, employees can still hit it big when the stock price jumps, but with a reduced burden on stockholders. Since there are no free lunches, you might wonder at whose expense do the employees benefit? The answer is past investors Certainly those who sell pay an opportunity cost. But there is no free lunch for current investors. Consider a hypothetical company growing its profits as a company at 50% per year. Assume that its share count increases 10% per year, with no stock buyback. No cash leaves the company, and cash comes in to the company from those who exercise options. Yet the profit growth, on a per share basis, has been reduced to 36%. The net present value of a stream of future earnings growing at 36% per year is considerably less than the net present value of a stream of future earnings growing at 50% per year. That difference is a cost borne by present shareholders. For those who only read in black and white: on the other side of the ledger, it is quite possible that this hypothetical company would not be able to attain the 50% growth as a company if it offered fewer options due to not getting the personnel needed. The difference between the 50% growth as a company, and the growth that would occur with some lower number of options, is a benefit. The net effect of these can not be known. It can and should be pondered. Questioning whether there is an overly generous options package is not being niggardly, nor is questioning if compensation is sufficient being profligate. It is part of understanding the economics of the business. Alternatively, our hypothetical company can elect to repurchase the shares. Cash does go out of the company, and this makes sense only if the expected return on the purchase is greater than that of the alternative investments - including the business. And in this case we should ask what does this tell us about the business? Are profitable opportunities limited? Is growth at the maximum level which can currently be managed? Or could they be fighting dilution? Oh no, impossible, they would only buy if they get a better return that way. :-) What then is the source of that return, and how is it realized? The size of the current pie (business, profits) is unaffected. The asset base has just been reduced. Could that return be simply greater stock appreciation (and corollary benefits, like strength in making acquisitions)? So if shares are repurchased - which fights dilution, and greater stock appreciation results - were the shares purchased to fight dilution or to garner a return? Sounds vaguely synonymous to me. For years, WIND allowed shares to grow from the dilution of options. Lately, the company is buying back stock. I keep inferring from your writing that you believe that the share count is decreasing. Have I misinterpreted you? I can find no evidence of this, only evidence of a growing share count. Pirah