Data: Comparing Stock Buybacks (#5) - Plus Symantec Case Study

Abstract

Stock buybacks to capitalize on undervaluation make sense, but, in combination with option plans, they may fall prey to the law of unintended consequences. To a degree in part determined by the size of option pools, buybacks use shareholder cash to increase the ownership stake of management (and employee) options. In payouts, stock and option interests diverge. A Symantec 2004-2007 case study extends a series that quantifies buybacks' skewed return benefits to management options. Symantec spends $6.7 billion to repurchase 27.8% of its shares. Its stock rises 3.2%. The direct result is a -$0.03 (-0.1%) pretax benefit per share versus securing a $5.57 benefit per option. Was the board's decision to spare option holders the cost of a dividend adequately balanced by consideration of the outcome for shareholders and the corporation's trading liabilities? The Symantec case is similar to other, recent company buyback studies: Alternative buyback return measures are discussed, absolute accretion is presented as a preferred measure, and divergent returns to shareholders and option holders due to payout decisions are calculated. Option holders are observed to earn' hedge fund type 2/20 fees for work on buybacks. In addition, a buyback comparative analysis draft framework is expanded to assist boards in adherence to governance best practices and aid shareholders in their assessment of a buyback's likely outcome. Ideally, the data presentation will be extended to cover an entire industry.