VideoWith share prices still plummeting—and the summer heat on—it appears corporate managers have gone fishin'.
Actually, it's more like bargain hunting. So far this year, publicly traded companies have announced plans to buy back at least $30 billion worth of stock, according to Trim Tabs, a company that specializes in tracking and analyzing stock market liquidity.
Last week alone, 30 companies announced plans to repurchase their stock. The total bill? $18.4 billion.
As a result, planned buybacks in July are expected to come close to the record $53.6 billion set last September, when many finance chiefs and CEOs were determined to reassure investors in the wake of the 9/11 terrorist attacks.
July seems to be a popular month for repurchasing stock. Last year, a record $237.6 billion worth of buybacks were announced, up from about $222 billion the prior year.
A number of high-profile companies have announced buybacks in recent weeks, including PepsiCo, Bank One, Home Depot, Citigroup, AIG, Procter & Gamble, and Pfizer.
"This share repurchase program reflects our great confidence in PepsiCo's ability to continue generating strong, consistent cash flow," said Steve Reinemund, PepsiCo's chairman of the board and chief executive officer, when he announced Pepsi's plans to repurchase 5 million shares.
Added Reinemund: "The fundamental health and vitality of our businesses allows us to invest in growth opportunities, pay a dividend, and buy back shares, all at the same time." The PepsiCo plan was launched last Friday.
It was a similar story at The Home Depot when that company's management launched a buyback plan on July 15.
"We believe strongly in the fundamental strength of The Home Depot," said Bob Nardelli, chairman and CEO, when the home-improvement retailer announced plans to repurchase its stock. "This repurchase announcement is not only a vote of confidence in our business and our associates, but for our loyal shareholders as well." Management at Home Depot plans to buy back up to $2 billion of company stock.
The Value of Valuations
Plummeting stock prices not only make buybacks attractive; they tend to encourage takeover attempts.
But remarkably, few finance chiefs at fast-growing companies have a good idea of what their businesses are worth. Or at least that's the takeaway from the latest "Trendsetter Barometer" from accountancy PricewaterhouseCoopers. According to that yardstick, management teams at more than two-thirds of the fastest-growing companies in the United States don't know the value of their operations.
Only 29 percent of the surveyed companies report having a current valuation. Of the rest, 9 percent are planning to have one completed in the next 12 months. About 15 percent noted they had conducted a valuation in the past, but indicated that it was no longer current. Fully 44 percent have no valuation—or no plans to obtain one.
Only 27 percent of technology companies have a current valuation, compared with 31 percent of nontech companies. Just 29 percent of service and product sector companies have a valuation.
"Current market conditions may have caused some of these high-potential companies to delay a valuation until business improves," says Paul Weaver, global technology industry group leader for PwC. "Whether to sell a company, make a public offering, or exchange equity for capital, a current valuation is a strategic must." (PwC offers valuation services.)
Interestingly, 25 percent of the CEOs surveyed have tried to sell their company at least once, either in its entirety (19 percent) or in part (6 percent), with most of these attempted sales (61 percent) occurring within the past two years.
Among the prospective sellers, only 48 percent have ever had a formal valuation, and only 33 percent have a current one.
"Entertaining momentous financial decisions without knowing the current value of the company is risky, and can result in equity and other financing transactions at below optimal levels for the owners," said Weaver.
Weaver believes a formal valuation "is critical to understanding the factors that make the company valuable to an acquirer, and therefore what must be achieved, postintegration, to justify paying a specific price."
According to the survey, companies planning new, first-time valuations appear to be attractive acquisition candidates.
On average, first-time valuers have grown nearly twice as large as their industry peers ($52 million in revenues versus $27.2 million).
Despite their larger size, these companies are also growing 31 percent faster than their rivals. The rate? 1,947 percent during the past five years for first-time valuers versus 1,482 percent for non-first-time valuers.
Among this group of first-time valuers, 54 percent are planning M&A activity, including a potential sale, in the next 12 months.
"Few business activities are more complex or risky as a sale or acquisition," notes Weaver. "These companies planning their first valuation have growth superior to their peers, and many have a clear interest in combining with others."
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