Wall Street Horizon Blog

Baby Got (Buy)Backs

Posted by Eric Soderberg on Nov 18, 2015 3:42:57 PM

With stock buybacks reaching historic levels in the U.S., Reuters published a very interesting piece on the subject yesterday called The Cannibalized Company.  What their research shows is that many companies including HP, IBM and 3M, are spending more on buybacks and dividends than they are on R&D and other forms of capital spending.  And what the critics are saying is that while these financial maneuvers may produce short-term gains for shareholders, in the long term they will cannibalize innovation, slow growth and harm U.S. competitiveness.

Since we track buybacks as a corporate event type in our products at Wall Street Horizon, I decided to take a closer look at the short-term effects that buyback/share repurchase 'announcements' have on a company's stock price (and by short-term I mean a day or two).  What I expected to see was a bump up in share price on the day of the announcement, and that was about it.

What I observed however depended on the type of buyback program the company was announcing.  If it was the most common 'open-market' stock repurchase program where the company was notifying the public that they would be purchasing shares 'on the open market from time-to-time and as market conditions dictated', my expectations for a single volatility event on the day of the announcement were met.

If on the other hand a company was announcing a 'fixed tender' or 'Dutch tender' offer to repurchase shares, I observed multiple price volatility events as illustrated below in the example of EMCORE Corporation (Nasdaq: EMKR).

With tender offer programs there are often times three volatility events to be aware of -- (A) the pre-announcement that the company intends to launch a tender offer, (B) the announcement that the tender offer is commencing and (C) the date and time upon which the tender offer will expire. The expiration date and time of the tender offer are required to be included in the commencement announcement.

EMKR_Chart_11_17_15_v2.png


So while a company can announce an 'open market' buyback at any time, and without a pre-announcement, tender offers are often pre-announced and include expiration dates and thus provide the investor/trader with two forward-looking dates to be aware of.

Whether buybacks are harming long-term U.S. competitiveness, or not, is up to you to decide.  Whether buybacks cause short-term volatility in a stock's price is almost certain . . . and be sure to keep an eye out for the 'modified Dutch auction' variety.