The other buyback positive: takeover defense measure

June 20, 2007

Sometimes the best offense is a good defense. 

Within 24 hours, at least three major companies announced more than $28 billion in stock buybacks. Beyond the prevailing wisdom of boosting earnings per share, buybacks are often anti-takeover measures as well. Expedia, Home Depot and Shinsei all announced mega buybacks recently. Are ravenous private equity buyers partly responsible for prompting the purchases? It’s tough to think, at least for Expedia and Home Depot, that they’re not.

Buyout firms are approaching virtually everyone in sight these days about a leveraged buyout. Expedia Chairman Barry Diller has told Reuters about bankers making the LBO case to him. While Home Depot has denied LBO talks, speculation about a $100 billion plus private equity buyout of the company has surfaced before, though seen as very far fetched among bankers and buyout executives.

Still, Home Depot stomped on the LBO idea when, late on Tuesday, it announced plans to purchase $22.5 billion worth of shares, ranking it among the biggest buybacks ever. That press release followed Expedia’s $3.5 billion buyback announcement–more than one-third of its stock. That was followed by Japan’s Shinsei Bank saying on Wednesday it would snap up $2 billion of its own shares.

The announcements come as more companies are pursuing–and in some cases doing–what some would dub “self-LBO” plans. “Why let a leveraged buyout firm take us over, when we can take matters into our own hands,” or so the thinking goes. Buyback shares, do a leveraged recap…Companies are getting wiser in the ways of doing LBOs on their own. In Expedia’s case, the anti-takeover reasoning behind the buyback is shared by at least one analyst. 
    “I think they felt that the shares were very undervalued and the company has very strong cashflows, and they expect to leverage that and take advantage of the low share price and return capital to share holders,” said Marianne Wolk, an analyst at Susquehanna.
    “We expect them to finance much of this repurchase. But because the company generates more than $500 million of free cashflow a year it won’t take them too long to pay back the debt. Its like a half LBO.”      
    “Certainly this does make it very difficult for any acquirer because they would have to negotiate with the insiders — that includes Barry Diller, although that is no different to what they would have encountered before.”

For Home Depot, the buyback will probably kill the leveraged buyout chatter that has persisted–mainly in a few media outlets–since late last year. The buyback makes an already expensive LBO candidate a heck of a lot richer in price.

STOCK BUYBACK: …..Its purpose is commonly to increase earnings per share and thus the market price,  often to discourage a takeover. (From a dusty copy of Barron’s Dictionary of Finance and Investment Terms)

(Additional reporting by Megan Davies)

(Photo: Reuters file)

One comment so far | RSS Comments RSS

While I understand the logic for doing a “part self LBO”, I do not understand why this would discourage a potential PE buyer from making a bid. The share price per share will indeed go up, and EPS will indeed go up, but that is only because the number of shares being traded will go down, keeping the market value of the company the same. So, if I am the potential PE buyer willing to making a debt powered bid, why will be I discouraged in any manner just because the share price has gone up. The total $ price I need to pay will remain the same. Of course I will likely have “powerful” promoter-management shareholders to worry about, but that would in any case be true. I do not see a material change in my ability to make the bid go through.

What am I missing.

Posted by Gurvinder Juneja | Report as abusive

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