Enviado: 8/12/2006 11:02Can you have your stock and sell it, too?
Critics contend that something is amiss when companies buy back stock at the same time executives are selling theirs.
November 2006
By Randy Myers
Add a new wrinkle to the longstanding debate about the wisdom of share-repurchase programmes: claims of a conflict of interest.
Companies cite many good reasons for buying back shares: the practice boosts earnings per share, it sends a signal that the company considers its shares undervalued and it finds a use for some of that vast cash hoard many firms have. Companies could, of course, pay a dividend, but many prefer the flexibility of buybacks because they are occasional events (the issuance of a dividend usually creates an expectation of regular payouts).
But what happens when a firm buys back its shares at the same time that executives are selling theirs? There are no laws to prohibit officers and directors from selling company stock while the company is buying. But at a time when investors and regulators are hypersensitive to even the appearance of conflicts of interest, should officers and directors who promote and authorise massive stock-buyback programmes also be taking the other side of those trades?
“In our view, there is an inherent conflict of interest when insiders are using the stockholders’ money to buy back shares on the theory that they are undervalued, and at the same time are unloading their own shares,” argues plaintiff’s attorney William Lerach of Lerach Coughlin Stoia Geller Rudman & Robbins in San Diego. “Certainly, when we evaluate whether to bring suit against insiders for securities fraud, it’s something we look for, and when we see it, we view it to be very incriminatory.”
Three years ago, Lerach helped negotiate a settlement of shareholder litigation with Sprint (now Sprint Nextel) in which Sprint agreed that it would no longer allow insiders to sell Sprint shares while the company was buying them. A Sprint spokeswoman claimed the prohibition applies only under “certain limited circumstances,” but declined to elaborate. Lerach says it is a reform other firms ought to embrace voluntarily.
Few have, in part because both buybacks and stock options as a form of compensation are relatively recent phenomena. In 1980, for example, the value of stock buybacks exercised by S&P 500 companies equalled just 10% of the value of the dividends issued, according to Scott Weisbenner, a finance professor at the University of Illinois who studied the issue while serving as an economist at the Federal Reserve Board from 1999 to 2000. By the late 1990s, however, companies were spending more on repurchases than on dividends. Weisbenner also found that between 1994 and 1998 the use of stock option programmes by S&P 500 companies grew by more than 40%.
Options play
Critics contend that potential conflicts of interest take several forms. For starters, options holders aren’t eligible to receive dividends, which may make them turn a blind eye to a practice that would benefit other shareholders. And dividends dilute the value of options because the share price is typically marked down to reflect the value of the dividend issued. In addition, a prime motivator for buybacks—to boost earnings per share—is seen by critics as potentially self-serving because many executives are compensated at least in part based on EPS targets. So using company money to inflate that figure can result in personal gain. Less clear is whether buybacks actually bump up the price of shares, allowing executives to garner more than they would have otherwise.
But as those recent figures on buyback activity indicate, rumblings from certain quarters seem to be having no effect on the popularity of the practice. “I think there’s a responsibility, if you accumulate too much cash on the balance sheet, to make a decision of some kind to return money to shareholders, unless you have it earmarked for something else,” says USANA Health Sciences CFO Gilbert Fuller. “Over the past five years, we’ve bought back something like 6.5m shares, and spent $130m (€103m) doing so. And we’ve chosen to do that rather than issue a dividend, primarily because it gives us more flexibility.”
The Salt Lake City, Utah-based company spent nearly $50m between 2005 and the first quarter of 2006 alone, a period during which company insiders sold USANA shares worth approximately $64m. Fuller cites several reasons why, noting that the firm’s stock went from less than $1 a share in 2002 to more than $40 a share this year. “First of all, it takes an iron stomach not to sell into that,” says Fuller. “Second, it’s a way for executives to balance out their cash needs. And third, there’s the issue of diversity. If you wake up and see that your stock has gone from under $1 to $44, common sense says you should diversify some of your holdings.”
Because of USANA’s compensation philosophy and its long-term commitment to stock-buyback programmes, Fuller says there have been times when insiders were selling stock at the same time that the company was buying. “But there hasn’t been an orchestrated effort to link when insiders were selling to times when the company was buying back shares,” he says.
This June, Los Angeles-based Audit Integrity, an accounting and governance analysis firm, sent a note to clients identifying 16 companies with market capitalisations of at least $100m that it considers at high risk for fraudulent behaviour, including USANA, because the companies have high levels of both stock buybacks and insider selling. Meanwhile, Lerach is putting the finishing touches to a lawsuit he plans to file against “one of the most high-profile companies in the United States,” along with its CEO, over issues relating to its buyback programmes.
In good times, in bad times
Fuller notes that USANA has simply followed a practice shared by many companies: paying modest salaries that are accompanied by sizeable equity-based compensation, and working to make the latter as valuable as possible.
US companies can arrange for their executives to sell their stock through 10b5-1 plans, named after the SEC rule that allows them to transact in company shares at all times, not just during open trading windows, without running foul of insider trading rules. Attorney Stephen Riddick, a principal shareholder with law firm Greenberg Traurig in Washington, DC, says steady selling activity by insiders pursuant to 10b5-1 plans, which are designed to be active in good times and bad, could be skewing the perception that insiders are timing sales to coincide with buybacks.
Lerach sees it differently. “Most of the time, we find there aren’t 10b5-1 programmes,” he says. “Most of the sales look to be discretionary and a result of insider decisions, not some pre-existing programme. But even if there is a 10b5-1 programme, I continue to believe there’s an inherent inconsistency in using the stockholders’ money to buy back stock while you’re unloading your stock.”
Jack Zwingli, CEO of Audit Integrity, is similarly sceptical. “If management benefits more from doing stock buybacks than from paying dividends or reinvesting in the business, it will buy back stock,” he says.
A cynical view perhaps, but if correct the cynics are on the ascendancy. Firms may have to look at this issue within the boardroom, lest they find themselves looking at it in the courtroom.
Randy Myers
--------------------------------------------------------------------------------
Knocks against buybacks
While it is commonly thought that buyback programmes foreshadow higher stock prices, substantial research suggests otherwise. Critics also say that firms run the risk of bungling the timing of buybacks, the net effect being a substantial waste of corporate cash.
In a 2003 study, J.F. Weston and Juan Siu, of the Anderson Graduate School of Management at UCLA, surveyed the academic literature from the prior two decades and found that, while buybacks in the 1960s and 1970s tended to precede substantial stock price gains, the phenomenon has largely disappeared. Part of the reason may be that during that time, most buybacks were accomplished through fixed-price tender offers in which management made it clear what it thought the firm’s stock was worth. Since the 1990s, most buybacks have taken the form of open-market transactions, which are less transparent.
But while some studies of the 1960s and 1970s show double-digit increases in share prices following the announcement of programmes, subsequent studies indicate that the good ol’ days appear to be over. A 1995 study by David Ikenberry, Josef Lakonishok and Theo Vermaelen in the Journal of Financial Economics looked at 1,239 open-market share repurchases from 1980 to 1990 and found that announcement of those buybacks sparked a five-day price jump, on average, of just 3.5%. Other research conducted between 2000 and 2002 says the gains are less than half that percentage.
http://www.cfoeurope.com/displaystory.c ... 71/l_print
Critics contend that something is amiss when companies buy back stock at the same time executives are selling theirs.
November 2006
By Randy Myers
Add a new wrinkle to the longstanding debate about the wisdom of share-repurchase programmes: claims of a conflict of interest.
Companies cite many good reasons for buying back shares: the practice boosts earnings per share, it sends a signal that the company considers its shares undervalued and it finds a use for some of that vast cash hoard many firms have. Companies could, of course, pay a dividend, but many prefer the flexibility of buybacks because they are occasional events (the issuance of a dividend usually creates an expectation of regular payouts).
But what happens when a firm buys back its shares at the same time that executives are selling theirs? There are no laws to prohibit officers and directors from selling company stock while the company is buying. But at a time when investors and regulators are hypersensitive to even the appearance of conflicts of interest, should officers and directors who promote and authorise massive stock-buyback programmes also be taking the other side of those trades?
“In our view, there is an inherent conflict of interest when insiders are using the stockholders’ money to buy back shares on the theory that they are undervalued, and at the same time are unloading their own shares,” argues plaintiff’s attorney William Lerach of Lerach Coughlin Stoia Geller Rudman & Robbins in San Diego. “Certainly, when we evaluate whether to bring suit against insiders for securities fraud, it’s something we look for, and when we see it, we view it to be very incriminatory.”
Three years ago, Lerach helped negotiate a settlement of shareholder litigation with Sprint (now Sprint Nextel) in which Sprint agreed that it would no longer allow insiders to sell Sprint shares while the company was buying them. A Sprint spokeswoman claimed the prohibition applies only under “certain limited circumstances,” but declined to elaborate. Lerach says it is a reform other firms ought to embrace voluntarily.
Few have, in part because both buybacks and stock options as a form of compensation are relatively recent phenomena. In 1980, for example, the value of stock buybacks exercised by S&P 500 companies equalled just 10% of the value of the dividends issued, according to Scott Weisbenner, a finance professor at the University of Illinois who studied the issue while serving as an economist at the Federal Reserve Board from 1999 to 2000. By the late 1990s, however, companies were spending more on repurchases than on dividends. Weisbenner also found that between 1994 and 1998 the use of stock option programmes by S&P 500 companies grew by more than 40%.
Options play
Critics contend that potential conflicts of interest take several forms. For starters, options holders aren’t eligible to receive dividends, which may make them turn a blind eye to a practice that would benefit other shareholders. And dividends dilute the value of options because the share price is typically marked down to reflect the value of the dividend issued. In addition, a prime motivator for buybacks—to boost earnings per share—is seen by critics as potentially self-serving because many executives are compensated at least in part based on EPS targets. So using company money to inflate that figure can result in personal gain. Less clear is whether buybacks actually bump up the price of shares, allowing executives to garner more than they would have otherwise.
But as those recent figures on buyback activity indicate, rumblings from certain quarters seem to be having no effect on the popularity of the practice. “I think there’s a responsibility, if you accumulate too much cash on the balance sheet, to make a decision of some kind to return money to shareholders, unless you have it earmarked for something else,” says USANA Health Sciences CFO Gilbert Fuller. “Over the past five years, we’ve bought back something like 6.5m shares, and spent $130m (€103m) doing so. And we’ve chosen to do that rather than issue a dividend, primarily because it gives us more flexibility.”
The Salt Lake City, Utah-based company spent nearly $50m between 2005 and the first quarter of 2006 alone, a period during which company insiders sold USANA shares worth approximately $64m. Fuller cites several reasons why, noting that the firm’s stock went from less than $1 a share in 2002 to more than $40 a share this year. “First of all, it takes an iron stomach not to sell into that,” says Fuller. “Second, it’s a way for executives to balance out their cash needs. And third, there’s the issue of diversity. If you wake up and see that your stock has gone from under $1 to $44, common sense says you should diversify some of your holdings.”
Because of USANA’s compensation philosophy and its long-term commitment to stock-buyback programmes, Fuller says there have been times when insiders were selling stock at the same time that the company was buying. “But there hasn’t been an orchestrated effort to link when insiders were selling to times when the company was buying back shares,” he says.
This June, Los Angeles-based Audit Integrity, an accounting and governance analysis firm, sent a note to clients identifying 16 companies with market capitalisations of at least $100m that it considers at high risk for fraudulent behaviour, including USANA, because the companies have high levels of both stock buybacks and insider selling. Meanwhile, Lerach is putting the finishing touches to a lawsuit he plans to file against “one of the most high-profile companies in the United States,” along with its CEO, over issues relating to its buyback programmes.
In good times, in bad times
Fuller notes that USANA has simply followed a practice shared by many companies: paying modest salaries that are accompanied by sizeable equity-based compensation, and working to make the latter as valuable as possible.
US companies can arrange for their executives to sell their stock through 10b5-1 plans, named after the SEC rule that allows them to transact in company shares at all times, not just during open trading windows, without running foul of insider trading rules. Attorney Stephen Riddick, a principal shareholder with law firm Greenberg Traurig in Washington, DC, says steady selling activity by insiders pursuant to 10b5-1 plans, which are designed to be active in good times and bad, could be skewing the perception that insiders are timing sales to coincide with buybacks.
Lerach sees it differently. “Most of the time, we find there aren’t 10b5-1 programmes,” he says. “Most of the sales look to be discretionary and a result of insider decisions, not some pre-existing programme. But even if there is a 10b5-1 programme, I continue to believe there’s an inherent inconsistency in using the stockholders’ money to buy back stock while you’re unloading your stock.”
Jack Zwingli, CEO of Audit Integrity, is similarly sceptical. “If management benefits more from doing stock buybacks than from paying dividends or reinvesting in the business, it will buy back stock,” he says.
A cynical view perhaps, but if correct the cynics are on the ascendancy. Firms may have to look at this issue within the boardroom, lest they find themselves looking at it in the courtroom.
Randy Myers
--------------------------------------------------------------------------------
Knocks against buybacks
While it is commonly thought that buyback programmes foreshadow higher stock prices, substantial research suggests otherwise. Critics also say that firms run the risk of bungling the timing of buybacks, the net effect being a substantial waste of corporate cash.
In a 2003 study, J.F. Weston and Juan Siu, of the Anderson Graduate School of Management at UCLA, surveyed the academic literature from the prior two decades and found that, while buybacks in the 1960s and 1970s tended to precede substantial stock price gains, the phenomenon has largely disappeared. Part of the reason may be that during that time, most buybacks were accomplished through fixed-price tender offers in which management made it clear what it thought the firm’s stock was worth. Since the 1990s, most buybacks have taken the form of open-market transactions, which are less transparent.
But while some studies of the 1960s and 1970s show double-digit increases in share prices following the announcement of programmes, subsequent studies indicate that the good ol’ days appear to be over. A 1995 study by David Ikenberry, Josef Lakonishok and Theo Vermaelen in the Journal of Financial Economics looked at 1,239 open-market share repurchases from 1980 to 1990 and found that announcement of those buybacks sparked a five-day price jump, on average, of just 3.5%. Other research conducted between 2000 and 2002 says the gains are less than half that percentage.
http://www.cfoeurope.com/displaystory.c ... 71/l_print