Data: Comparing Stock Buybacks (#7) - Plus Xilinx Case Study

Abstract

Stock buybacks to capitalize on undervaluation make sense but, in combination with option plans, may fall prey to the law of unintended consequences. Buybacks use shareholder cash to increase the ownership stake of management (and employee) options, buyback returns favor option holders at the expense of shareholders, and returns to option holders are substantially richer from buybacks than from reinvestment and always better than a dividend.

A Xilinx 2004-2007 case study extends a series that quantifies buybacks' skewed returns in favor of management options. Xilinx spends $2.0 billion to repurchase 20.1% of its shares. Its stock rises 1.6%. The direct result is a $0.04 (0.1%) pretax benefit per share versus securing a $5.36 benefit per option. Apparently, Xilinx's board saw cash payout as preferable to reinvestment and a buyback as preferable to a dividend. Did that decision adequately balance competing interests of shareholders and option holders and weigh corporate trading risks? Although not a principal focus of the current report, Xilinx's accelerated repurchase program also renews concern on the efficiency of buyback pricing.

The Xilinx case is similar to other, recent company buyback studies: Buyback return measures are discussed, "absolute accretion" is presented as a preferred measure, divergent returns to shareholders and option holders are calculated, and a buyback comparative analysis framework is expanded. Ideally, the comparative analysis presentation will be extended to cover an entire industry to assist boards in adhering to governance best practices and aid shareholders in their assessment of a buyback's likely outcome.

Keywords: Xilinx, xlnx, Applied Materials, AMAT, Symantec, Symc, Oracle, ORCL,Texas Instruments,TXN, Intel, INTC, NVIDIA, NVDA, stock buyback, stock repurchase, share buyback, share repurchase, option compensation, management options, governance, payout, dividend, 10b5-1, 10b-18, capital structure

JEL Classification: G30, G32, G35