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Technology Stocks : Network Associates (NET) -- Ignore unavailable to you. Want to Upgrade?

To: Jim Bananas who wrote (3343)	10/13/1998 3:22:00 AM
From: Chuzzlewit	Read Replies (1) \| Respond to of 6021

Hi Jim: Funny thing about stock buybacks -- they don't add to s/h value (no matter what the press says). In effect, they are tax efficient DRIPs. Look at it this way: Suppose a company has 10MM shares o/s, each share selling for $10. Now suppose that the company has $10MM in excess cash. It could either dividend the cash to s/h or buy back the stock. If it dividended the $$, each share would be worth $9. That's clear enough. But if it bought the stock back the total capitalized value prior to the buy-back would be $100MM. After the buyback the capitalized value would be $90MM ($100MM - $10MM). But now there would be 9MM shares o/s, each worth $10. Which is exactly what the s/h value would be if the company dividended ($9 for the stock + $1 for the dividend). It does, however, increase the proportionate ownership by 11.1% and thus increase eps (neglecting interest income generated by the amount earmarked for dividends and/or stock buybacks). The one positive you can say about buybacks -- they are more efficient from a tax perspective because dividends are taxed as ordinary income. The bottom line is that stock buybacks should have no effect on the stock price if the marketplace is acting rationally. So, buybacks, like splits, are just illusory sources of increases in s/h value. It's all smoke and mirrors. TTFN, CTC