Sweet Fees and Remedies on Stock Buybacks (#3) - Intel Case Study

Abstract

A case study of Intel's 2004-2007 buybacks extends a series of reports on the division in buyback benefits between shareholders and management options.

Intel spends $23.1 billion to repurchase 14.3% of its outstanding shares. The stock subsequently rises 0.7%. Intel shareholders "benefit" by -$0.05 (-0.2%) before tax due to the direct effect of the buyback; Intel executives benefit by up to $3.46 per option.

Future stock price fluctuations will change actual returns on Intel's buybacks, but the advantage to executive (and employee) options will persist. In addition to salary and bonus for running operations, execs with options receive hedge fund type "2/20" fees from their buyback "work". The skewed returns are paid by shareholders and tilt management preferences towards buybacks at the expense of dividends and/or business reinvestment.

Four remedies are suggested to rebalance dividend, buyback, and reinvestment incentives. Companies should report:

1) Absolute accretion from buybacks 2) Option expense at time of exercise 3) Monthly VWAP at time of buybacks 4) Income on buybacks

Keywords: Stock Buyback, Stock Repurchase, Share Buyback, Share Repurchase, Intel, INTC, NVIDIA,NVDA,Texas Instruments, TXN,option compensation, management options, governance,10b5-1,10b-18

JEL Classification: G3, G30, G32, G35