The $1.742 Billion CFO - MPS Cashless Buybackk Case Study

Abstract

M became CFO of Monolithic Power Systems, Inc. (MPWR-$61.21) in 2011. Since 2004, MPS’ $184.1 million spent on buybacks boosted its share price by about $6.54, roughly a 12.0% benefit. A fraction of that was earned on CFO M’s watch.In October 2012, with MPS trading at $18.00, a Cashless Buyback™ proposal was delivered to M. Implementation cost was minimal. If executed, then, as soon as MPS’ stock price reached $61.14 at any time within 9 years, MPS would receive a tax-free, cash “bonus equity” payment; MPS would pay no penalty if it missed the target. In December 2015, MPS’ stock price reached $69.25. Had M put in place the Cashless Buyback™, MPS would have received $1.742 billion, and, today, MPS’ shares would be trading roughly $43.33 higher, a benefit in absolute size and relative to cost far in excess of anything MPS achieved through 11 years of traditional buybacks. Does MPS CFO M believe she missed an opportunity? Does she give the situation a second thought? Does she regret her decision, or does some mechanism insulate her from any sense of error or responsibility? Might she, if asked, calmly recite reasons why declining to move the Cashless Buyback™ forward made perfect sense (“The transaction was new! Who could say what might have gone wrong! I did not know the vendor!”). Has she forgotten the proposal altogether? It may be that no one keeps track of things not done, but the fact is, M’s inaction cost MPS. She is the $1.742 billion CFO.This report, in addition to relating the MPS case, discusses the risks of traditional stock repurchase programs, highlights some programs that, for the moment, rank among the best (STMP, VRSN) and worst (EXAR, ISIL) within a small sample, and discusses governance issues that attach to buybacks as raised particularly by the recent LPL Financial (LPLA) litigation.