加速股票回购

This week there was a new development in the share buyback mass shareholder value destruction exercise which has gripped American companies and has some following in the UK.

To date this year Citigroup reckons that in the US market there have been 26 Accelerated Share Repurchases or ASRs totalling $8.5bn.

What happens in an ASR is that the company does the whole or a significant proportion of a share buy-back programme in a single transaction with an investment bank or a small group of banks rather than executing the programme over an extended period in line with volumes traded in the market. The investment bank(s) makes a short sale to the company and borrows the stock it delivers to the company.

Of course, at some point the investment bank will need to purchase stock to cover it's short position and enable it to return the borrowed stock to the stock lender(s). Investment banks are not noted for doing something for nothing and certainly not taking on short positions just to assists companies. After all, share buy-backs can generate share price rises at least in the short-term and indeed part of the raison d'etre for Accelerated Share Repurchases is to trigger a bigger short-term boost to share prices. No sane organisation would go short of shares faced with that likelihood. So the company is required to give the investment bank an agreement to cover any losses it incurs in purchasing the shares to cover the short.

In an 118.8m share ASR which IBM did in May 2007 it paid an initial price of $105.18 per share for the shares purchased from the investments banks' short sales totalling $12.5bn, and then another $2.95 per share or a total of $351m to cover the higher price of $108.13 at which the banks eventually closed their shorts.

One of the rules that I have found in business life is that when management is doing something they really don't want examined they use polite euphemisms to camouflage the reality of the situation. Thus, the payments by IBM to the banks are termed "adjustments" in its accounts not "extra costs" or even "losses".

This is a truly amazing thing for a company to do. I have previously contended (Share Buybacks: Friend or Foe? Fundsmith, April 2011) that many companies seem to pay little or no apparent heed to the implied returns from share repurchases or even the price at which they buy-back shares. With an ASR they literally have no idea at what price they are repurchasing them. They have in effect agreed to write a blank cheque to the investment bank to cover the cost of eventually purchasing the shares. How can this be acceptable? Surely all but the most stupid management must accept the contention that the price at which shares are repurchased has some bearing on whether the repurchase creates or destroys value for remaining shareholders. What this implies about managements lack of understanding and/or care about shareholder value seems to me to amount to malfeasance.

Add to that the fact an ASR gives investment banks even more ways to take money from the unfortunate shareholders of these companies. No doubt there is commission and a bid-offer spread on the short sale, then interest on the stock borrow and prime brokerage fees for arranging it, then further commission and bid-offer spreads on the ultimate purchases. Who knows, maybe some of these companies are actually daft enough to pay an advisory fee for the investments banks' advice on ASRs. It's a field day for the investment bankers who, let's remind ourselves, are engaging in a risk free trade. Let's also not forget that they earn precisely zero from that other totally acceptable means of distributing cash: dividends.