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Re : CEOs Reap Millions

Last week the New York Times quoted Street analysts on an interesting development involving the three biggest giants of hi-tech: Intel, Dell and Texas Instruments. Their shares have been dropping in the last year even though the companies have been reporting steeply climbing profits, well beyond analysts' expectations.

The analysts pointed at an interesting item in said companies' financial statements, an item that tends to get overlooked in analytical reports and in articles in the press. Namely, the companies' book equity. While Dell, Intel and Texas report profits in the billions of dollars each year, their shareholders equity (the difference between assets and liabilities) keeps shrinking, even though they hardly pay any dividends to shareholders.

Where is the money going?

Why is that? Because the companies are using the cash they generate to buy back their own shares on the market. In the last year Dell bought back $7.2 billion worth of stock, which was greater than its earnings. Intel repurchased $10.6 billion worth and Texas Instruments bought back $4.15 billion worth of its shares.

Why are the companies buying back their stock so aggressively? Naturally - because they want to reduce their float and increase profit per share, which is the main parameter by which analysts measure their performance.

So if they are buying back so many shares on the market, why is their number of floating shares not dropping?

Naturally - because they keep handing out stock options to managers and employees. The options get converted into shares, which increases the number of floating shares, the company buys back the shares on the market using its cash, and around and around it goes.

What is the bottom line? Simple. Much of the cash the companies are earning is streaming straight to the pockets of the management. Even better from the managers' perspective is that the tremendous perk they're getting doesn't get booked in the company's report, if the options were granted at the market price.

The gambit is nothing new. What has changed is that Wall Street analysts are paying closer attention to it. They are asking whether these companies really are generating value for shareholders, or mainly for their own people.

http://www.haaretz.com/hasen/pages/ArticleContent.jhtml?itemNo=696854

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