ASRs Part V - Rumpelstiltskin Accounting: Spinning Gold from Straw (Silicon Image Addendum)

Abstract

The current study celebrates Silicon Image's 2008 $62 million accelerated stock repurchase (ASR) program. Companies commonly indicate ASRs contractually promise execution of stock buybacks at a favorable price. To the contrary, analysis of a small sample of 2006-2007 ASRs has found: 1) Inferior risk/reward relative to simple alternatives (inefficient execution), 2) Liability (ASRs are denied a 10b-18 safe harbor against charges of manipulation), 3) Disturbing, pre-deal, stock activity (prices rise 10% shortly preceding an ASR), 4) Idiosyncratic, incomplete, and sometimes misleading disclosures. 5) Disproportionate exposure to counter party risk. Silicon Image's ASR shares the standard shortcomings, but the firm's auditors, executive protestations notwithstanding, go the extra mile in delivering an imaginative rendition of reporting conventions. In conformance to 15th century tradition, modern accounting deems that equity transactions, including stock repurchases, never give rise to income. Accordingly, Silicon Image might, in a run of the mill performance of ASR financial legerdemain, after paying a premium price for its repurchases, with the usual hocus-pocus presto-change-o, flash-of-light and puff-of-smoke, have commissions, fees and true economic consequence of fluctuating share prices vanish...materializing in their stead, from thin air, an unblemished income statement, pristine, the proverbial white rabbit. But, with an extra flourish and added abracadabra, Silicon Image's auditors transmogrify the $62 million ASR into a $1 million reported profit earned through the transaction's dealings with counter party banker Credit Suisse. Now, that is some trick. We need not believe Credit Suisse took a loss on its side of the bargain (do we rush to aid the lady the magician will saw in half?); the illusion is spectacle enough, and it would be dangerous to interfere. In brief, Silicon Image makes full use of conventional stock buyback reporting blandishments, but its auditors go a troll's stomp further in insisting the firm profits and that, like Rumpelstiltskin, their client Silicon Image spins gold from straw.