A CEO’s pushback on buybacks

Update Jan. 20 – After a week, our unscientific poll on whether share repurchases are a good way to create value shows 40% “It depends,” 35% “No” and 25% “Yes.”

An interesting comment on share repurchases – always a stock-market darling for some institutional investors – is reported today in the In Vivo blog, which covers pharmaceutical and biotech businesses and their capital markets:

During the breakout session after his talk here at the JP Morgan conference Sanofi CEO Chris Viehbacher was asked if Sanofi would consider a buyback. His answer was a resounding “no.”

After explaining that his company was “clearly mindful of shareholder value” and citing Sanofi’s dividend as an example of that commitment, he gave his opinion on buybacks.

Companies resort to share repurchases when they’ve “run out of any ideas,” he said. “And the day we run out of ideas, I will retire on that day and let my successor do a share buyback.”

You have to give this CEO credit for his “over my dead body” directness.

My feeling is that repurchases make sense for some companies, in mature or out-of-favor businesses for example, as financial engineering that helps share value.

A firm with growth opportunities crying out for investment – say, new drug R&D projects needing 15-20% of revenues – can argue it has a better idea for using shareholders’ cash. Of course, then management has to deliver on the promise of those investments.

What’s your buyback feedback? Answer the poll, comment, or both.

© 2010 Johnson Strategic Communications Inc.


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3 Responses to “A CEO’s pushback on buybacks”

  1. Anna Candler Says:

    Have to agree with the Sanofi CEO. Buybacks are a lazy way of “creating value”. What they say to shareholders is “that with all our experience and talent and business acumen we have no better way to grow shreholder value than to buy back your shares”.

    And by definition out–of-favour businesses and mature businesses are companies who have forgotten how to innovate, streamline and rebuild.

    Frankly I rather suspect buy-badks are driven buy stockbrokers looking for commission not for the reality of building true shareholder value

  2. Bradley Jay Meyer Says:

    I agree with Dick Johnson that stock buybacks sometimes make sense, such as for highly profitable software companies and undervalued small caps. Given the disastrous acquisitions that many firms have engineered, we’ve seen countless examples of where repurchasing shares represented a much smarter known value.

    I don’t agree with Ms. Candler that stockbrokers drive such business decisions, although I do agree that mature businesses usually need to pursue innovations.

    As for undervalued and un-followed small caps, some could benefit from buybacks while others would be much better off doing equity secondaries and generating equity coverage.

    Equally important for many undervalued companies is that executives purchase shares in the open market. The failure to support and send a message to loyal shareholders in this way is often astounding, as can easily be seen in companies that have rallied hundreds of percent off of lows during which there was no such insider buying.

  3. Don Allen Says:

    I agree buybacks make sense for some companies, and it depends on the individual company’s situation. I had a client years ago who ‘owned’ 80% of their sector in the semi fab equipment market. They were rolling in cash, they had invested as much as they could in new capex and acquisitions, and their stock price was lower than they felt it should be. After researching the best way to structure a buyback, the board decided to take an opportunistic approach and buy in the open market when conditions were favorable. They didn’t do a 10b5-1 buyback because they didn’t want to commit to a program that could limit them in changing market conditions. Their buyback was open-ended. It was very successful and their return was higher than any investment they could have made in short-term securities.

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