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Corporations Show Self-Love
Myth and Merit of Buybacks

By Jeffrey L. Newman
ABCNEWS.com from TheStreet.com
N E W   Y O R K, Oct. 29 � IBM showed its financially savvy muscle yesterday, as the technology powerhouse announced a $3.5 billion stock repurchase plan, helping to boost yesterday's market rally. Following suit were a handful of other notable companies, which used Monday's plunge to gobble up shares of their stock, including Knight Ridder, PepsiCo, Stride Rite, Mark VII and Parlux Fragrances.
     The buyback move of these corporate giants echoed similar moves of companies after the 1987 crash. On that day, hundreds of corporations stepped in and marked the bottom. It was broader than the smattering seen yesterday, but it showed where corporations see real value in their own shares and offered individuals a nice piece of confidence.

Perception Isn't Always Real
While IBM announced its buyback plan, helping its stock jump more than nine points yesterday, it did not actually implement anything new. Rather, its board simply authorized repurchase of more company shares. None of the stock bought yesterday was part of that plan. In fact, as of Sept. 30, the company still had $1.1 billion left of its current buyback program to execute. Moreover, since 1995, IBM has been averaging about $1.6 billion worth of repurchasing each quarter, totaling more than $16 billion.
     "The thing that no one seems to get is that IBM has been buying back stock for a long time. This was just part of a long-term plan. The buyback announcement was expected and a planned continuation of an already existing program. It had nothing to do with the market drop," says Brett Rekas, an analyst at BancAmerica Robertson Stephens. "The fact that the board meeting happened to be at the time of the market drop and that the announcement was made was sheer coincidence. I talked to IBM two weeks ago and they said they were planning this meeting to extend the buyback program."
     Wendy Abramowitz an analyst with Argus Research agrees that IBM's buyback announcement was really a continuation of what they have been doing. "Based on their history it was expected and no great surprise," she says. "But, the fact that they got in [before the rebound], was part of an already-in-place plan. It was expected from investors."

Different Measures of Time
In the case of Knight Ridder, its board only voted to increase its existing buyback program to include an additional 8 million shares (about $200 million worth); it executed little to no buys yesterday. The move simply followed a similar announcement back in April.
     "There wasn't whole lot of time for companies to initiate programs like this," says Laura Conigliaro, an analyst at Goldman, Sachs. "With IBM, it was a very fortuitous and well timed move, but it was not the kind of thing IBM would have done suddenly as a knee-jerk reaction to a one-day drop in the stock market. That actually would have been an alarmist reaction. They have always been well-balanced and reacted as such."
     David Fried, editor of the Buyback newsletter, says that after the 1987 crash, nearly 800 companies took such action. However, only a few hundred were actually executed because the market rallied before any good deals could be had.
     Fried says that while it's still too early to determine how many companies actually have or plan to initiate new or additional repurchasing plans as a result of Monday's drop, expectations are that it will not be in the droves it was a decade ago.
     "The thing people have to understand is that you only have a couple of hours there to take advantage of the situation. The number of shares a company could've taken off the market would have been very small. It was a very small window," says Fried. "The net effect was very small. Most of these companies�with the exception of, say, Stride Rite�were already buying back shares."

Buying Confidence
Says Conigliaro of Goldman, Sachs, "Things are different now than in 1987. Stock repurchasing programs are now a part of many corporations and an expected thing."
     The biggest problem in tracking these purchases is that companies are not obligated to announce buyback programs or report them unil the end of the quarter. "You don't know who did repurchase and who didn't until they report. There are is no data or source for this information," says Peter Canelo, a stategist with Morgan Stanley. "But whenever companies have discretionary funds, they tend to accelerate purchases on periods of big market declines."
     Logic itself would also offer evidence that few new repurchasing plans will have been initiated as a result of Monday's tumble. The drop happened on Monday. The boards of these companies can't meet that fast. The earliest they could meet would have been late Monday afternoon or early Tuesday, leaving a very small window of opportunity for these companies to go shopping for value-oriented buys.
     "For most of the companies that used the buyback option yesterday, it was just part of an overall existing plan," Conigliaro adds. "Since 1987, the concept of corporate buybacks, whether to augment earnings per share or offset employee stock-option programs, has grown in importance, especially in the technology arena."

Dumping Chips on Dips
GE is the perfect example. The company put in place a 4-year, $13 billion repurchase program in 1994. Yesterday, the company did not make any changes, despite a drop of nearly five points from Friday's close of 66 to Monday's close of 61 15/16. The stock closed up Tuesday at 65 15/16.
     "Each day we buy five to 10 percent of our daily volume," says GE spokesman Bruce Buch. "We probably bought in the higher range [closer to 10 percent] when the price was down, but it was business as usual."
     Amgen, which expects to repurchase as much as $1 billion worth of stock, didn't make any out-of-the norm purchases on Tuesday, despite a two point drop on Monday. Even Mark VII and Parlux, which both made announcements, traded at levels significantly lower than their 30-day average trading volume, indicating minimal buyback activity. Even StrideRite's volume was nearly half of its 30-day average.
     "The bottom line is this. If you are selling into a decline and the company is buying back stock, you have to think about who is on the other side of transaction," says Fried. "You may be selling as a result of a nervous panic. But you are probably selling it back to the company itself, which thinks its long term prospects are great."

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