HP’s board has just okayed $10 billion dollars on share purchasing … but it’s not an M&A move. It’s to buy shares in HP. What gives? Is HP desperately narcissistic or in deep and confusing financial trouble?
“HP intends to use the additional authorization as part of its ongoing program to manage the dilution created by shares issued under employee stock plans to repurchase shares opportunistically,” says a new company press release. “We plan to be active in repurchasing our shares, and we expect to repurchase at least $3 billion worth of our shares [sic] in our fiscal fourth quarter at current price levels,” HP’s CFO and interim CEO Cathie Lesjak add. HP notes that it’s repurchased about $2.6 billion of shares in the third quarter and still has nearly $5 billion in an authorized fund from last November. Boil this down to its core, and you have this: HP is busily engaged on a huge share repurchasing drive, and it’s actually accelerating its efforts. This is to complete as much as possible before the fourth quarter fiscal announcement in November.
Now for the why.
Share repurchasing is a complicated beast, and it can mean one of several things. First-up, HP may be acting to “undo” bad business decisions made in the past–it really may feel that its employee stock plans (which may have been over-enthusiastically rolled out) have messed up the normal run of trading in its shares, resulting in an undervalutation in terms of market capitalization. In this case a share buy-back would push up earnings per share, and act as a bonus to HP’s “real” valued shareholders–assuming it destroys the repurchased shares, it’ll push up earnings per share, and act as a de facto dividend. It’s a bit of a slap in the face for HP staff, but at least they’ll soothe their chafe with cool cash sums from the share repurchase.
In some ways of measuring a company’s success, earnings-per-share growth is more important than raw revenue growth figures, and in this case the repurchase makes even more sense.
The repurchase may be also a reflection that HP sees no better investment opportunity than itself–an old market chestnut. By choosing to sink so much cash into what amounts to an internal fiscal maneuver, HP is effectively sending a bit announcement to the markets that it’s supremely confident in the state of its business. This will have many subtle pay-offs.
On the other hand, a share repurchase program can cover a host of sins. It’s an activity that looks and sounds good, but may be a distraction: HP can’t think of anything better to do with $10 billion–there’s nothing innovative in terms of M&A options it’s currently pursuing. Perhaps the deal to buy Palm has been more fraught with problems than we know, and hasn’t returned as many benefits quickly enough to match with HP’s pre-purchase hopes. And if share repurchasing happens when the share price is artificially high, then it’s a terrible move, with the company concerned probably better-off investing in more reliable assets that can be converted back to cash at a later point–assuming you’re desperately looking for somewhere to sink the cash rather than leaving it in a bank. Given that HP’s share price has been on the slide for several months, this probably isn’t the case.
So: HP is probably buying back its shares to demonstrate its internal confidence, and to reverse what its board sees as some causes behind undervaluation. We wouldn’t be surprised if it was also slightly a political move, ahead of financial results it may be worrying are less than ideal.
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