Share buybacks are what happen when you run out of ideas. Financial engineering

https://twitter.com/garrytan/status/431709411560521728

by mikepmalai • 12 years ago

3 4 12 years ago

ergoproxy2• 12 years ago

Damn straight. Look here: "Apple's [Tim] Cook told [Carl] Icahn that he's still studying Icahn's proposal to buy back $150 billion worth of the company's stock." Source: http://www.cnbc.com/id/101151952 (Monday, 11 Nov 2013)

Apple makes about $60B/yr in profit. Ichan wants Cook to borrow $150B to buyback Apple shares. Icahn and Cook would be the main beneficiaries of this plan.

I've seen this many times in non-tech firms. Look at Borders book store. They did several rounds of this over decades to boost their stock price. Each round, enriching the officers and board members, and piling the company up with loads of debt. E.g., November 27, 1996. "Borders Group Inc., the retailer of books and music, said today that it would buy back up to $50 million of its common stock." http://www.nytimes.com/1996/11/27/business/borders-in-stock-...

Eventually, they couldn't service their debts and they went bankrupt. The officers and board members couldn't care less. They got rich. Their employees and customers got screwed. Their creditors took everything including the pension fund. Some commentary here: http://www.datalounge.com/cgi-bin/iowa/ajax.html?t=11235835#...

The moral of the story: Corporate raiders and vulture capitalists could care less about anybody but themselves. They'll gladly drive successful businesses into bankruptcy to make a lousy buck. Along the way, they make the employees suffer. And they reduce competition in the market place and hurt consumers. And we make it easy for them as a society by pretending this is how capitalism is supposed to work. Shame on them; shame on us too.

Throwadev• 12 years ago

How do they get rich off the buy backs? Explain like I'm five. Do all the Joe Schmoes who own the common stock as art of their 401k's benefit from it as well?

pedalpete• 12 years ago

They are removing the number of shares on the open markets, so it's a 'less to go around' type sitation, or you can think of it as limiting supply.

In theory (I believe), the market cap for the company should stay the same, so each share increases in value. Cook and Icahn are major share holders, so they would be increasing their value.

However, it isn't a zero-sum game (hope I'm using that correctly) as in the short term, with rising stock price, all investors win.

On the flip side, the money used for a buy-back is money not invested into R&D, which for a tech company is obviously very important.

Though, I wonder if Apple may be a bit of an anomaly. They have such a huge profit margin, and strong following, and a group of customers who will buy pretty much anything they release at pretty much any (moderately unreasonable) price.

Apple doesn't spend (and loose) on R&D like Google and Microsoft do. There doesn't appear to be anything in the Apple quiver which came as a result of massive R&D effort. Massive design effort, absolutely. Massive engineering effort, sure. But straight R&D? I don't think so. Happy to be proven wrong though.

ergoproxy2• 12 years ago

Tim Cook borrows $150B and uses it to buy Apple stock. This shifts the demand curve for Apple stock out (to the right). The equilibrium price of Apple stock rises. Tim Cook sells his stock at the new higher price. He profits.

More likely Joe Schmoe's pension plan will see Apple's stock go up and buy more shares, thinking there's real market demand for it. But there isn't. This is really just a variation on the classic "pump and dump" scheme.

Worst case scenario: Apple does this three or four more times, can't service its debt, and gets driven into bankruptcy. Then Joe Schmoe's Apple shares in his 401k are worth $0.

Share buybacks are what happen when you run out of ideas. Financial engineering

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