Tuesday, January 31, 2006

Live for today

Despite the view of some that accountants and other financial types are dull people, they can really have an imagination. Take the matter of buying back a company's stock. It's a pretty straightforward deal, right? The company offers to buy 1,000,000 shares at $20. Some people think the cash is worth more than the future prospects of the company and accept the offer. The company wants to improve its earnings per share as well as make a good investment. Over time they eventually buy the 1,000,000 shares. Simple until the financial types who get paid for boosting earnings per share came up with the idea of "accelerated share repurchase" (ASR).

With accelerated share repurchase the company does not buy the shares over time. They make a deal with an investment bank to buy the shares in the open market and pay the bank the $20,000,000 in my example. The problem is it takes time to buy the 1,000,000 shares, time in which the share price fluctuates. If the price goes up, the company pays the investment bank the difference. If it goes down, the investment bank pays the company.

In the meantime, the earnings per share increases and the company looks good on Wall Street, as they don't show on their books that there is a potential liability in this transaction. Full disclosure? Companies that have used this technique include DuPont, Sara Lee, Northrop Grumman and Duke Energy.

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