Analysis of 50 largest buybacks finds post-announcement sales by executives dwarfed sales over prior 12 months
That's because, according to a Financial Week analysis of the 50 largest buybacks, at several of these companies, chief executives sold sizable chunks of stock while the buybacks were ongoing. What's more, the size of those sales exceeded, and in most cases dwarfed, their stock sales in the 12 months before the buybacks were announced.
The following eight CEOs have shed some of their holdings in the midst of a stock repurchase program.
-- Disney's Robert Iger has sold $41.6 million in stock since the company announced its $10.2 billion buyback in January 2006. In the year prior to the buyback, Mr. Iger sold $5.6 million worth of stock. -- EMC's Joseph Tucci has sold $4.75 million in stock since the company began its $3 billion buyback program a year ago. In the year before the buyback began, Mr. Tucci had no stock sales. -- Hewlett-Packard's Mark Hurd has sold $11.8 million in stock since the company began its $6 billion buyback in August 2006. (In March, the company authorized an additional $8 billion buyback.) In the year prior to the original buyback, Mr. Hurd sold less than $1 million worth of stock. -- Terry Lundgren of Macy's (formerly Federated Department Stores) has sold $12.9 million in shares since the company announced its $6 billion buyback in August 2006. In the year prior to the buyback, he sold $9.4 million in stock. -- Merrill Lynch's Stanley O'Neal has sold $30 million in stock since Merrill Lynch began its $6 billion buyback program in February 2006. (In April, the company announced its board had authorized a further $6 billion in buybacks.) In the year prior to the original buyback, Mr. O'Neal sold $5.8 billion in stock. -- PepsiCo's Indra Nooyi has sold $12 million in stock since the company announced its $8.5 billion stock buyback program in May 2006, which is part of a longer repurchase program that has gone on for several years. In the year prior to the buyback, Ms. Nooyi sold less than $100,000 in stock. -- Safeway's Steven Burd has sold $47.7 million since the company began its $4 billion buyback program in December 2006. In the year prior to the buyback, he had no stock sales. -- Valero Energy's William Kleese has sold $18.1 million in stock since the company began its $6 billion repurchase program in October 2006. In the year prior to the buyback, Mr. Kleese had no stock sales. At all the companies, the buyback programs are still ongoing.
A Macy's spokesman noted that Mr. Lundgren's sales were related to options that were expiring, which was also the case for PepsiCo's Ms. Nooyi. Sales by EMC's Mr. Tucci and Hewlett-Packard's Mr. Hurd were part of 10b5-1 plans, which are routine or previously committed plans to sell stock, said spokespeople for the respective companies. Disney's Mr. Iger and Safeway's Mr. Burd sold options that were expiring and were also part of 10b5-1 plans.
Merrill Lynch and Valero Energy did not respond to requests for comment. Buybacks are supposed to increase shareholder value, because they send a signal to the market that the stock is undervalued. But they also typically provide a pop in the stock price, noted Rob Leiphart, an analyst with Birinyi Associates, which tracks buybacks. While it's perfectly legit to sell stock into a buyback, CEOs who sell could be taking advantage of that boost in the share price.
George Muzea, founder and president of Muzea Insider Consulting Services in Reno, Nev., a firm that monitors insider trading for institutions, said that to prevent this kind of behavior, companies could prohibit insiders from selling stock for a certain period after a buyback is announced. "Just as some companies prevent trading around earnings release dates, they should impose the same rules when they make an announcement of a buyback," he said, adding that such restrictions are at the discretion of the company, since the Securities and Exchange Commission doesn't have a mandate for it.
"Whether they're actually doing the buyback or not doesn't matter, since it gets people excited," said Mr. Muzea. In some of the cases, insider stock sales are part of 10b5-1 plans. But that doesn't matter, said Mr. Muzea, since insiders typically have quite a bit of latitude with such plans.
That was the argument of analyst Ronald Redfield, who in a recent Countrywide Financial earnings call, challenged CEO Angelo Mozilo, who has sold a reported $118 million in stock while Countrywide has been engaged in a buyback. Countrywide announced its $2.5 billion buyback plan last November. "The legality is fine, but one can think that perhaps the price is being held up (by) the buybacks, creating a demand," said Mr. Redfield in the conference call. Mr. Mozilo countered that the buybacks were in the best interest of shareholders. "It is a personal situation that I'm selling into a market no matter where the price of the stock is," he said in the call.
In cases of expiring options or 10b5-1 plans, the chief executives don't necessarily have to sell the stock; they can exercise the options and keep the stock. "There is no harm if the shares are expiring, that the executives exercise the options, and then dispose of the stock when the buyback is completed," noted Darren Robbins, a founding partner with Coughlin Stoia Geller Rudman & Robbins.
In the past, as part of settlements in shareholder lawsuits, companies have agreed to prohibit executives from selling stock during a buyback, noted Mr. Robbins. One instance occurred in 2003, when Sprint reached a settlement related to two class-action lawsuits stemming from its derailed merger with WorldCom.
And CEOs who profit from stock sales may also benefit a second way: from the boost to earnings per share that buybacks provide. Many executive compensation plans are tied to earnings goals, so lowering the number of shares outstanding through a buyback can be easy, risk-free way of getting an earnings boost.
Paul Hodgson, senior research associate at the Corporate Library, found that the use of earnings per share as a compensation incentive was much more common among companies that were conducting buybacks. "If you buy back shares, you're reducing the denominator, and earnings increase, even though they haven't increased, as it were," said Mr. Hodgson. "Some buybacks are perfectly legitimate and sensible uses of spare cash. Others appear to be less well designed strategically."
Financial Week's analysis of the 50 largest buybacks included stock repurchases of $3 billion or more that have been announced or completed since the beginning of 2006, with data provided by Zephyr, the deal database arm of Bureau van Dijk Electronic Publishing. The selling activity of the companies' chief executives in the weeks and months after the buyback was announced, until the buyback was completed, using data from InsiderScoop.com was then reviewed. Finally, the CEO's selling activity during the buyback was compared with his or her transactions in the 12 months prior to the company announcing the plan. FW
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Source: Financial Week
