Comment on this Article

Are Buybacks Really a Bargain? How deliberately deflating earnings might be helping some companies boost their share price.

Alan Rappeport, CFO.com | US
March 8, 2007

Buybacks

Could somebody please explain if buybacks are so great, why would anybody sell?

Posted by Raymond Darke | Mar 12, 2007 4:21 PM ET

Stock Buybacks

Excuse me for seeming cynical, but I view stock buybacks as part of an overall strategy for corporate insiders to take cash out of their company, largely to the detriment of shareholders.

The cycle goes something like this:

(1) Issue large blocks of stock options for the benefit of selected insiders during a period of depressed earnings, thereby establishing a low strike price.

(2) The cost of redeeming the options when they are "in the money" does not flow through the income statement and therefore has no effect on reported earnings.

(3) At a later date when earnings improve and the stock goes up in price, insiders use corporate cash to buy back outstanding shares to offset the dilution effect of having issued all those stock options to themselves.

True, some non-insider shareholders benefit from stock buybacks if they were prescient enoough to have purchased their stock during the period of depressed earnings, but by and large the real benficiaries of this option granting/stock buyback scheme are the corporate insiders.

Posted by Jerome Brick | Mar 9, 2007 4:21 PM ET