Stock Buy Backs

August 10, 2006

When Cumulus bought Susquehanna last May – my interest in public corporations naturally increased.

One fairly common issue that gets reported in radio trades – but never explained is the practice of stock buy backs. Clear Channel has been doing it all year. And Cumulus just did it in June.

In searching for info about what this means – I found a common answer – it’s supposed to be great news for shareholders.
If a company has 100,000 outstanding shares – buys back 10,000 – each of the remaining 90,000 shares now represent a larger portion than before.

Instant gratification. Kinda.

I ran into a post about the issue by Blog Maverick Mark Cuban.

In reference to Microsoft’s recent buy back, Mark lets it be known that he thinks stock buy backs is a horrible idea –

There is no better example of trying to manipulate earnings and stock prices than through the stock buyback, and there is no worse message to send to long term sharedholders than through the stock buyback.

To stock traders, the buyback makes perfect sense.

If you buy stock in the open market, you help maintain the stock price. If you buy back shares of stock, you reduce the number of shares outstanding, which in turn increases the earnings per share.

….it rewards the exact thing that should not be rewarded. It rewards people getting out of their investment, while not rewarding keeping the investment.

In other words – stock buy backs are “exit strategy” for institutional investors and insiders that want a quick return – not shareHOLDERS.  Holders largley get shafted – which is Mark’s gripe.

share buybacks are horrid for several reasons

  1. It allows companies to manipulate earnings per share. Buy back enough stock, and you will hit your Wall Street expectations.
  2. Companies will undertake risky cash management strategies to pay for the share buybacks.
  3. Companies will undertake buybacks with CEO and management incentives and bonuses in mind. Hit those numbers, earn lots of stock and options.
  4. Companies will buyback stock so that they can re-issue it to themselves and employees.In essence – they use the market as their personal and corporate piggybanks. They Buyback stock to push up earnings in hopes the stock goes up.Then they issue the stock to themselves.Then if the stock goes up, they sell the stock they awarded themselves to unsuspecting shareholders who have no idea the money they are paying for shares is going to insiders.

Stock buybacks are a very bad idea for investors and a very profitable idea for insiders and traders.

I guess this is my welcome to the world of publicly traded companies.

So everyone involved in this GAME thinks it’s a great idea.

Mark does not.  Who do you listen to?

For me . . . it’s Mark.

Why?  Simple.  Mark has “fuck you” quantities of cash.

He’s not dependent on stock buy back schemes to make his “number”.

He’s not running a company engaged in this activity – (he prefers dividend fyi) so he doesn’t have a vested interest in defending the activity the way say . . . oh I don’t know . . . a CEO doing buybacks might.

There’s lots of reasons why companies buy back stock and Mark doesn’t address them all. But that doesn’t negate his very solid points.
My only interest in this is the extent to which Radio is engaged in these activities.  And I have to admit to being disappointed.

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