M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Wednesday, September 1, 2010

HP and its Extra $15 Billion

So while we sit and wait for Dell to decide whether it wants to bid a penny more for 3Par, I think it's interesting to note that HP announced a stock buy-back over the weekend.  In this case, HP committed an additional $10 billion to its ongoing stock repurchase program.  Remember that before going into the 3Par bidding war, HP had something like $15 billion in cash.  Now, it's decided to give away most of that in the form of a stock repurchase.  

Why companies think a stock repurchase is better than simply announcing a dividend is a tricky question.  The stock repurchase does somethings that are attractive for managers.  First and foremost, the repurchase allows managers to shrink the number of outstanding shares in its capitalization.  Once you have shrunk the denominator, presto the stock price goes up (for a day or so).  Or, it should.  For managers who might have bonuses and other compensation tied to stock price, getting the stock price to rise is a good thing.  On the other hand, a one time special dividend doesn't have the same kick on the stock price.  So it depends on what one is trying to accomplish with the buy-back.

A share repurchase can also have a strong signalling function.   That's to say, when insiders think the market is undervaluing shares, goes the theory, they authorize a share repurchase.  OK, I guess.  But that's not what is happening with respect to HP.  What's happening here is that shareholders are unhappy with HP's decision to take its excess cash and engage in a bidding war that it will likely lose (even if it wins) with Dell.  Committing $10 billion of its $15 billion to a share repurchase credibly signals to investors that HP won't be engaging in more of these kinds of game - mostly because it can't any more.

That's a good thing I suppose.



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share repurchases also have tax benefits for most shareholders vs. dividends. a disciplined share buyback (i.e. purchases below intrinsic value) is generally a great thing. in HP's case, it almost certainly is a better use of cash than overspending on 3Par. Some companies have a habit of using share repurchases to keep a bid under the stock which is an awful reason and a poor capital allocation decision. One bad share buyback I can remember is Garmin when it was at $70+. Eddie Lampert's companies - AN, AZO, SHLD - have made excellent use of share buybacks over the years.

Posted by: RM | Sep 1, 2010 8:22:11 AM

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