Do Stated Corporate Stock Repurchase Motives Impact Stock Repurchase Plan Results? Part II – KLA-Tencor Case Study

Abstract

Do well-conceived stock repurchase plan motives correlate with good stock repurchase plan results? Do ill-conceived stated motives correlate with poor results? KLA-Tencor states it initiated a stock repurchase plan “…to reduce the dilution from KLA-Tencor’s employee benefit and incentive plans such as the stock option and employee stock purchase plans.” However, using stock buybacks to offset options dilution is unlikely to maximize the profitability of a stock repurchase program. At best, such a directive will result in a company repurchasing shares at the average price during a given period, and the directive may easily be interpreted in a fashion that causes a company to repurchase shares at far above the average price over time. Certainly, for the moment, the raw performance of KLA-Tencor’s stock repurchase program leaves something to be desired. From FY00 through FY10, KLA-Tencor paid $3.139 billion to repurchase 68.7 million shares at $45.69 apiece. Now trading at $32.81 apiece, KLA-Tencor’s buybacks during this period generated an $884.9 million economic loss, 28.2% of the cash invested, before consideration of foregone interest income. Absent buybacks, KLA-Tencor’s shares today would be trading more than 16.1% higher. Selling shareholders may have benefitted from KLA-Tencor’s buybacks, but, so far, ongoing shareholders definitely have not.As in an earlier study of National Semiconductor, KLA-Tencor’s stated buyback objectives (“offset dilution”, “distribute cash”) in combination with its buyback program’s subsequent raw performance (246th best among 276 companies surveyed) raise the question of whether ill-conceived stated motives for corporate stock repurchase programs correlate with poor stock repurchase program results. Do companies as a group run less effective stock repurchase programs when they cite “improve return on capital”, or “offset options dilution”, or “reduce excess cash” as operative buyback motives rather than a more logical goal – “repurchase undervalued shares”? Ideally, analysis of a company’s buyback program should consider adjusted performance, not just raw performance. The outline for a more definitive study is described.