This article is provided to FT.com readers by mergermarket—a news service focused on providing actionable, origination intelligence to M&A professionals. www.mergermarket.com
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While 2007 has been a great year for technology mergers and acquisitions, one little-noticed fact is that it has also been a great year for technology share buybacks, mergermarket reports. This week’s USD 10bn program by Dell, its first since 2005, illustrates what bankers say is a key rule: buy what you know.
Indeed, a rough calculation of share buybacks implemented just this year by 15 leading listed technology companies including Electronic Data Systems, IBM, Hewlett-Packard, Cisco Systems and EMC shows they have announced 2007 buybacks exceeding USD 45.2bn.
By contrast, through 30 November, US technology companies announced acquisitions valued at USD 61.2bn, according to Mergermarket data.
“When companies aren’t smart enough to know where the markets are going, they have a couple of objectives for the shareholders’ cash,” said Shawn McLoughlin, CEO Americas for Collins Stewart. “If they don’t want to risk it buying another business, they put it to work buying back their stock.”
The practice also helps the shares, at least in the short term. Cognizant Technology Solutions, the New Jersey-based services specialist, saw its shares gain 5% Friday, following announcement of an additional USD 100m buyback. That doubled the previous amount announced only last quarter, when the company had cash and investments exceeding USD 800m. The move “further underscores the Board’s confidence,” said CEO Francisco D’Souza.
That’s one rationale behind NCR’s new USD 583m buyback, which CEO Bill Nuti said this week was a way to reward shareholders of the 123-year-old Ohio-based company which just divested its Teradata software business. Nuti, a one-time M&A official at Cisco where he participated in more than 80 acquisitions, has a bias against large ones; “Most of them fail,” he said again Thursday.
NCR is a good example. Founded in 1884, it was acquired by listed AT&T in 1991 for USD 7.4bn as part of the telephone giant’s disastrous foray into computers. It was only spun off again in 1996. Since Nuti arrived in August 2005, the shares have gained about 44%. This year’s return has been about 17%.
Dell, the Texas PC maker in turnaround mode after business setbacks and a protracted financial probe, is committed to both buybacks as well as possible large acquisitions, a strategic change, CEO Michael Dell told shareholders this week. Dell, like many technology companies, had long used buybacks. This week’s buyback is the first since an equivalent buyback in early 2005.
“Some technology firms like Dell and Oracle have never paid dividends and my bet is they never will,” said Douglas Skinner, professor at the University of Chicago Graduate School of Business. “Companies that traditionally would have paid dividends are going straight for stock repurchases.”
That is one reason why it was Wall Street news when Intel announced its first ever dividend – a dime a share - in 1992. Since then, it has paid out about USD 8.9bn dividends and its shares have had a total return of nearly 1,500%. Meanwhile, Intel still has not completed a USD 25bn share buyback announced in November 2005.
In 2004, when Microsoft’s cash reached USD 50bn, it declared a USD 32bn “special dividend” that rewarded shareholders and also raised an extraordinary sum for the Bill and Melinda Gates Foundation.
Even after tapping USD 5bn to acquire listed aQuantive last quarter, Microsoft reported nearly USD 21bn in short-term assets as of 30 September. The Washington-based software giant bought back more than USD 31bn in shares for the fiscal year ended 30 June.
Skinner’s research shows that there is a link between buyback announcements and promising future performance. The level is driven by earnings, he said, especially as fewer technology companies pay any dividends. And it could foreshadow more acquisitions ahead, especially if companies expect solid cash flows.
“Given the market uncertainties right now, if I were given a hunk of cash and told ‘Do what you want with it,’ I would rather build up my own business than take a chance on an acquisition,” said Collins Stewart’s McLoughlin. Of course, when the time is ripe, the company with cash can just as well tap it for an acquisition, he added.
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