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See related case examples of

Dell Inc.

appraisal rights for intrinsic value realization

and

Walgreen Co.

stock buyback policies

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Forum reference:

Audit firm promotion of consulting on analysis of buyback and dividend alternatives

 

The advertisement below was referenced as a source for the "influence of short-term investors, such as activist shareholders," in March 28, 2016 Investment News: "Stock buyback plans do little for long-term investors | Corporate execs, activist investors get the biggest bang from repurchase plans."

For another PwC presentation of the client service report linked below, see

 

Source: PricewaterhouseCoopers LLP | PwC Governance Insights Center (published on LinkedIn), March 16, 2016 advertisement

 

Paula Loop

Leader of PwC's Governance Insights Center

Thinking About Share Buybacks With Eyes Wide Open

Mar 16, 2016

Three critical areas that are always top of mind for investors when discussing the board’s oversight role are the performance of the CEO, the company’s strategy, and the company’s capital allocation plan. The company’s capital allocation plan gets to the very center of the long-term versus short-term investment debate. There is a rebuttable presumption that most of the big institutional investors are investing with a long-term lens, but there is also agreement among investors that every company needs a balanced capital allocation plan that addresses the needs of the company with both short- and long-term elements. 

At a high level, this all seems very logical—until you throw into the mix the $170 billion of assets under management with activist hedge funds[1] and the more than $1.4 trillion in cash on companies’ balance sheets.[2] That combination makes a very attractive target for activists that want to direct some of this cash back to shareholders. One result we are seeing: a record number of share repurchase programs, and with that, a lot more debate on this topic.

Both directors and investors need to be comfortable that they fully understand the ramifications of a share buyback program and have thought through any short- and long-term effects. Directors need to clearly understand all of the downstream effects a share buyback plan might have on the company’s key metrics that impact CEO compensation, and investors need to understand the company’s equity and debt structure, as well as any potentially adverse accounting and tax implications of returning cash to shareholders. And, not to mention, all parties need to understand the impact this form of capital allocation has on available capital for other investments.

Continuous and transparent discussions with shareholders allow the board and management to get useful feedback that can help the company continue to focus on its strategy. The capital allocation plan should be part of these discussions, giving investors confidence that the company is appropriately focusing on long-term value creation and not unnecessarily hoarding cash on the balance sheet. An element of the plan might be a share buyback program, but going into it with eyes wide open is the best way to go.

For more insights about returning cash to shareholders, read our first Director-Shareholder Insights, “Is cash burning a hole in your pocket? Thinking through share repurchases and dividends.

 

[1] Activist Insight Annual Review 2016.

[2] FactSet, Cash & Investment Quarterly, December 21, 2015; http://www.factset.com/websitefiles/PDFs/cashinvestment/cashinvestment_12.21.

 

 

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