Accelerated Stock Repurchase Programs: Underreported and Overpriced? Part I (AMAT, CY, LLTC and XLNX Case Studies)

Abstract

A previous study failed to identify economic benefits to explain the 2006-2007 popularity of accelerated stock repurchase programs (ASRs) funded through issuance of convertible debt. The case study of a $600 million transaction by Cypress Semiconductor did find cosmetic advantages in terms of earnings presentation (expenses largely bypass the income statement to go directly to the equity account instead). The deal was profitable for Cypress, but other structures offered superior risk/reward, the ASR component appeared easily $15 million overpriced, and reporting was problematic. The current study looks at ASRs of four companies. In addition to the Cypress ASR, those of Applied Materials, Linear Technology, and Xilinx are considered. Execution, reporting, and performance of all four ASRs are troublesome. The initial ASR commitments are at prices 5-15% higher than the companies' stock prices in the week prior to execution. Insofar as the initial stock delivery is followed by any subsequent deliveries, pricing on subsequent deliveries is subject to idiosyncratic reporting that tends to obscure (no price given) or substantially understate (price averaged over multiple reporting periods) the actual price paid on transactions in any given period. All surveyed companies fail to disclose the negotiated premium or discount versus VWAP (volume weighted average price) for their ASRs, the exact timeframe for calculation of VWAP, and VWAP specifications (such as exclusion of trades by the company, bankers and investors involved in the ASR and related transactions). Companies that execute ASRs ought to disclose VWAP benchmark terms, uniformly report monthly stock transactions that reflect the actual price paid (if any) for shares when delivered, and, if appropriate, ascribe a portion of the total ASR outlay to a fee. While ASRs enjoy no 10b-18 safe harbor against charges of manipulation, they carry the usual 10b-18/10b5-1 governance freight plus the added baggage of misleading disclosures and disturbing, pre-deal, pricing patterns. Whether ASRs facilitate efficient execution of large buybacks with superior governance may be an open question, but the need for better disclosure seems reasonably conclusive.