Firms Step Up Stock Buybacks To Counter the Market Drop

Large share repurchases became high-priority items for U.S. public companies as the stock market plunged in the wake of the September 11 attacks on the World Trade Center and the Pentagon. Firms large and small committed more than $20 billion in additional funds in the final three weeks of September to buying back their shares as price-support mechanisms. Commitments ranged from as little as $1 million to the $4 billion authorization voted by FleetBoston Financial Corp. Between September 11 and September 30, according to SDC Platinum, directors at 225 companies voted to allocate $20.9 billion in new or increased funding for buybacks. That worked out to an average of nearly $7 billion a week. By contrast, authorizations between January 1 and September 10 involved 575 companies and allocations of $69.9 billion, or roughly $2.1 billion a week on average. In depth, the board actions ranged from authorizations that would shrink outstanding shares by just a few percentage points to a move that would contract the company’s equity capitalization by nearly a quarter if fully implemented. In addition to the new and expanded allocations, scores of companies said they would accelerate buyback programs already underway while others got into the act merely by affirming that they would continues existing programs. Aggressive share repurchase programs got unusual governmental assistance when the Securities and Exchange Commission (SEC) suspended a rule governing buybacks, in effect giving the companies carte blanche to buy heavily through the trading day. The waiver, among other things, allows firms to execute repurchases in the final hour of trading, which normally is off-limits for buyback activity. Elimination of pooling-of-interest accounting for mergers and acquisitions earlier in 2001 also removed an inhibition because the rules change also did away with a stricture that barred pooling treatment for acquirers that had done extensive buybacks in the prior two years. Presumably, a wave of buybacks will be helpful to future m&a activity if it bolsters the supply of treasury stock that can be unlocked as currency for tax-free acquisitions. However, it remains to be seen just how much of the authorizations will be translated into actual buying of shares. Many analysts have contended that companies often don’t put their money where their mouths are, authorizing repurchases but rarely acting under them, even when a wave of allocations has followed an extraordinary event. Interestingly, not a single company in the final three weeks of September voted a self-tender that would have brought in a big slug of stock quickly but required a hefty contemporaneous pay-out of cash. There may have been little stomach for borrowing heavily to fund a self-tender during a jittery economy. With the help of SDC Platinum, M&A will try to track the scorecard on actual buying versus authorizations in future issues.