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To: Chuzzlewit who wrote (61441)	8/27/1998 12:24:00 PM
From: JRI	Read Replies (2) \| Respond to of 176387

OT Share buybacks... (A friend of mine had a question, and I thought I'd ask you)... He is doing some market research on a company in the utility industry, and that company has initiated a share buyback...He noted that the industry is undergoing massive consolidation (lots of firms buying each other)...His question to me was: "Why would a company buy back its own stock and could this be a reaction to (the consolidation going on in the industry). Would this/Could this mean that the firm is likely to buy another (utility) firm or that they might get bought out? My answer: Companies look at different ways to use cash on hand...Sometimes, companies (who (should) place increasing shareholder value at the top of the list) look at stock buybacks as a way to best increase shareholder value (and/orinvest the cash) vs. all other alternatives....Another possibility, although not necessarily the case, is that companies will buyback stock to defend themselves from possible takeover....that stock buybacks reduce the number of shares out on the open market and that with fewer shares out on the open market- the % of shares held by management increases, all things being equal. The higher % of shares held by management, the greater the possibility for management to fight an (unwanted) takeover. However, just because management has initiated a stock buyback, it does not (necessarily) mean that they are worried about an (unwanted) takeover possiblity... I told my friend that I couldn't think of a reason why a company would do a stock buyback if they were looking to buy other firms (in the industry)...that it would make more sense to "hoard cash" (and not buyback stock), so they wouldn't have to borrow to fund the takeover....even with today's low interest rates.. I guess these are the significant points. Anything you'd like to add/correct? Thanks in advance..

To: Chuzzlewit who wrote (61441)	8/27/1998 12:52:00 PM
From: Geoff Nunn	Respond to of 176387

Chuz, I think we're entirely in agreement, except maybe at the end where you write: Thus, I would expect that the dividend-paying stock to be a little less valuable to the investor than the stock repurchasing company. The result, in a fully discounting market, would be a nominal increase in the value of the repurchasing company relative to the dividend paying company. I think I would be more comfortable just stating that the value of the dividend paying company would fall. The value of the stock repurchasing company would rise in relative terms but I'm less sure about a nominal increase. In order for its nominal value to rise, there ought be an increase in its stream of after tax expected future cash flows, and I'm not sure we established that. Geoff