It is time to stop quivering in our boots in pointless fear of the future and just roll up our sleeves and build it.
- Ray Pierrehumbert

Wednesday, September 24, 2008

Buying back its own shares

Whatever else Microsoft will achieve by buying back $40 bn of its own shares, it has certainly achieved demonstrating how confused I am about finance.

It seems to me if a company "buys back" 10% of its shares, the remaining shares are worth 10/9 of what they were before, and the company has billions of dollars less to use. I fail to see what advantage accrues to the company.

If a company buys back all but one of its shares, is the remaining shareholder the sole owner of the company? If the company buys back all of its shares, is it owned by nobody?

Can anyone help?

Update: OK, so there is no direct advantage to the company, I guess. It's just a form of dividend, a way to pump money back into the hands of shareholders and thus make it easier to issue shares in the future. In the case of Microsoft and cash-rich tech companies in general, a rising share value also helps recruit talented engineers who stand to benefit from that increase.

The hardest question seems to be this: what happens if a company buys back its last share?

Suppose a failing company secretly acquires a fabulous patent. The shares are worthless; outstanding debt exceeds cash on hand but cash on hand exceeds market valuation. The board is in a position to buy up all the outstanding shares and does so, using the company's money, not their own. Who owns the valuable patent?

(Is the board a corporate entity itself in that it can own things? If so how does one own a share of the board? This is like Zeno's paradox, but I don't see the calculus that resolves it. Does the sequence converge?)



coby said...

I'm no CFO, but I suspect it means that the company's board of directors now controls those shares, the 90% or single share left out there is still just 90% or one share.

I imagine that at a stockholder's meeting the board controls the vote for its shares. The shares can be given to employees or resold at will (more imaginings).

Dano said...

I'm guessing they think they are a good value at that price and want more control of their shares. And they may be thinking that fewer shares in a tanking economy is good.



Pico said...

So if a company owns 100% of it's shares then who get to appoint the board?

In a rational World I would have thought that the employees are the owners of the company shares and so get to elect the board.

However in societies adhering to (ir)rationalist economics I'm sure that that concept would probably be considered communist and therefore abhorrent.

James Annan said...

It's a standard way of returning spare cash to shareholders (by inflating the share price rather than a direct dividend), especially when the company thinks that the shares are undervalued.

Belette said...

But the share price out to have reflected the value of the money in the bank, so it shouldn't increase the share price at all. In theory.

Ian said...

I think it just means that they think that the best way for microsoft to invest their spare money is right now is to buy microsoft. Since should be able to to put more trust in their own balance sheet than anyone else's, you can see their point.

And to recycle a 1929 joke told about John D Rockerfeller investing:
Warren Buffett just put 3 billion or so into Goldmann-Sachs --- sure, who else has any money left.

dt said...

And I'm no economist :) Now, if there was just one share outstanding, yes, that one shareholder would own the company. If there were no shares outstanding, then either the company would have gone private, been reorganized, or would have gone out of business, in either case it would no longer be a corporation or at least the same corporation.

To belette's point, she would be right if the share price only reflected the value of money in the bank. And this is exactly what makes the buy back attractive to the corporation, when the value of shares is cheap compared to the value of cash in the bank. The company is betting that the value of the shares is historically low and that it will be able to put them back on the market at some later date in order to raise even more cash.

tidal said...

I wish I had more time to respond, but the gist of the issue is hit upon in the above posts.

One thing to note is that these buybacks are "gross", not net. Companies make big press releases to announce buybacks (usually announced as "up to xxxx shares", not necessarily acted upon), but you have to actually pour through the financial statements to see how many new shares were simultaneously issued - for employee stock incentive issuance, etc. I know that my firm has announced billion dollar share buybacks every year for many years and made good on them, and the total share count has barely budged - in fact slightly grown. In aggregrate, S&P 500 companies over time are consistently in net issuance, regardless of all the announced buybacks... Just food for thought, balance.

In the case of Microsoft in particular, however, I think they are in net buyback.

Belette said...

"It's just a form of dividend, a way to pump money back into the hands of shareholders"


If your company is worth $200M, of which $100M is value and $100M is cash-in-bank, and has 200M outstanding shares, then each share is worth $1. If the company buys 100M shares, then its cash-in-bank is zero, and so its total worth is $100M. There are now 100M shares outstanding, so each is still worth $1.

Michael Tobis said...

Err, I dunno, it sounded right the first time...


Hank Roberts said...

Dano said...

Err, I dunno, it sounded right the first time...Anyone?

I'm sticking with what I said above, and Hank's once-again-excellent link reinforces my point.

Reading the press release, it also looks like they wanted to do something with the cash they set aside for the failed Yahoo purchase, and fewer shares may push up the dividend, which fell off lately.

At any rate, it must be a terrible burden to have US$15-25-40B sitting around, burning a hole in your pocket.



EliRabett said...

Cash sitting around makes you a target for the jackels (aka Carl Icahan, the Aldi bros, T. Pickins, etc). Buying back stock raises the value per share and the price for those who don't take the buy back (aka Bill Gates). If necessary the bought back stock can be put in the treasury and sold again when it is necessary to raise capital.

OTOH giving a dividend just gets rid of the cash.