Plans, Seen as Shareholder Boon, Can Backfire
Stock buybacks are a boon for shareholders, right?
That’s been the
spin, anyway, as hedge fund activists have pushed corporate managers to spend
billions repurchasing shares in recent years.
But not all
buybacks are created equal, and exhibit A is LPL Financial Holdings, a brokerage
and investment advisory firm in Boston. LPL recently completed a $275 million
stock buyback spree that was exceedingly costly, increased the company’s debt
and wound up primarily benefiting a powerful insider investor.
column from Gretchen Morgenson examining the world of finance
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Shareholders typically like repurchase programs because a company’s
earnings per share rise as the number of its shares outstanding falls,
often propelling its stock price. These purchases can also support a
company’s stock when the overall market is in decline.
are on a tear so far this year. Authorizations are up 41 percent through Feb. 11
from the same period last year, according to
Birinyi Associates, a stock market research
firm. Financial companies are among the bigger players in the buyback market
But as LPL
Financial’s recent buybacks show, there are pitfalls aplenty in these
LPL is the nation’s largest independent brokerage firm,
supplying investment technology and advisory services to 14,000 financial
advisers across the country. Founded in 1989, the firm sold a majority stake in
2005 to two
private equity giants,
Hellman & Friedman
and TPG Capital.
In 2010, LPL
sold stock to the public for the first time at $30 a share. After the initial
offering, the private equity firms held 63 percent of the company. Three years
later, Hellman & Friedman exited its investment, distributing its LPL holdings
to its investors. TPG kept a stake in the company and two seats on the LPL
struggled lately. In May, the Financial Industry Regulatory Authority
sanctioned the firm for supervisory failures
related to its sales of certain
exchange-traded funds, real estate
investment trusts and annuities. LPL paid a $10 million fine and $1.7 million in
restitution to customers; it neither admitted nor denied the accusations.
late summer, with LPL’s stock lagging,
Marcato Capital Management, a
$3.5 billion activist hedge fund overseen by Richard T. McGuire III,
came knocking. Mr. McGuire started his company in 2010 after a stint
at Pershing Square, a hedge fund founded by William A. Ackman.
In recent years,
Marcato has rattled corporate cages at NCR, a technology company, and Lear, an
auto parts maker, prodding the companies to change their capital structures.
On Sept. 21,
Marcato disclosed in a regulatory filing that it had been buying LPL shares and
owned about 6.3 percent of the company. Marcato had amassed the
six-million-share stake, it
said, because it thought LPL’s shares were
undervalued; it said it might discuss ways to enhance shareholder value with
LPL stock closed
at $40.20 that day, a 3 percent rise. A little over a month later, on Oct. 29,
LPL announced that it was going to “maximize shareholder returns.” The chosen
formula was to amend its credit agreement to allow for an additional $700
million of borrowing and buy back $500 million of its own shares. The stock
closed at $42.91 that day.
moved quickly to execute the buybacks. By Dec. 10, LPL said it had completed an
accelerated plan, repurchasing $250 million in stock, or 5.6 million shares. Its
average cost a share was about $44.50, the company said.
But instead of
going into the open market to buy the stock, LPL repurchased 4.3 million shares
from TPG, the private equity firm and partial owner. That meant more than
three-quarters of LPL’s $250 million buyback spending went to TPG.
still owned 8.6 million LPL shares, the transaction allowed the firm to dispose
of about one-third of its stake at what turned out to be a very sweet price.
LPL declined to
answer my questions about the buyback, including those about how its board had
determined that buying back TPG’s shares was the best way to execute the
repurchases. In regulatory filings, the company said neither of the TPG-affiliated
directors had participated in approving the LPL buyback. The company also said
TPG approached Goldman Sachs, the company LPL had hired to execute the
On Jan. 14,
Marcato disclosed that it, too, had jettisoned some of its LPL shares, reducing
its holdings to 4.9 percent from 6 percent. By then, LPL shares had fallen to
on Feb. 11, after the stock market closed. LPL disclosed fourth-quarter and
year-end 2015 results, with profit falling 35 percent in the quarter and 5
percent for the year. The company cited extreme market volatility as the main
factor behind the woes.
disclosure, LPL noted that it was still buying back shares. As of Feb. 11, it
said it had paid an average of $39.41 for 630,000 shares.
and the earlier ones looked unfortunate indeed when LPL’s stock collapsed to
$16.50 the next day. It has recovered a bit to $22.42 now.
But the damage
had been done. In an attempt to enhance shareholder value, LPL increased its
debt to buy back shares. Then the stock collapsed to less than half the price it
had paid to repurchase those shares. And the biggest beneficiary of the buyback
was TPG, a private equity firm with a stake in the company. TPG declined to
hedge fund that appears to have instigated LPL’s recent stock buyback, reduced
its stake, too. The fund did not reply to an email seeking comment about its
investment in LPL.
Given that its
stock is in the cellar, now would seem to be the time for LPL to ramp up its
repurchase program, offsetting some of the high prices it paid in past
transactions. From early 2013 through April 2015 — well before the latest round
— the company bought back almost $300 million of stock at prices between around
$42 and $52, regulatory filings show.
though, now has less cash to devote to such a buyback plan.
fund activists have made a habit of swooping into companies they see as
vulnerable and demanding changes to their capital structures. Stock buybacks are
a popular page in these funds’ playbooks.
But as the LPL
Financial story shows, these tactics may not wind up helping shareholders at
A version of this article appears in print on March 13, 2016, on page
BU1 of the National edition with the headline: A Buyback That Stung
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New York Times Company