Share repurchases: Don’t shoot the executioner
A company’s decision to repurchase shares doesn’t happen overnight. It’s a strategic move that takes weeks or even months to be fully agreed on before it's handed over to the treasury team for execution. Everyone has their own part to play: bankers make the pitch; the CFO oversees the process; the board or finance committee votes to approve; treasury team structures and executes to get the best price possible at the time of the trade. There’s a separation of the strategic decision from the tactical execution process.
This process is known and understood on both the client and banking side, yet unfortunately, situations often occur—usually following the appointment of a new board member or senior leader—when the treasury team is blamed for executing the repurchase order at a price higher than the now current value. When, in the eyes of the new boss, the treasury team didn’t create the value that they thought they would.
The reality is that value creation is almost completely out of the hands of the treasury team. If they had the ability to know future share prices, then I’m 100% sure they wouldn’t be working in treasury but running a hedge fund somewhere.
The treasury team is just the scapegoat. If the market share price is cheaper today than when the share repurchase was executed (based on a decision made weeks earlier) that’s because the company must be experiencing some form of weakness in the eyes of investors. The root of the problem is in the operations of the business, not the skill of the treasury team.
It’s worth taking a moment to assess the decision driving the share repurchase in the first place. Often it’s because company management believes the shares are “cheap”; that is, they are trading at a level below their intrinsic worth. The top brass naturally has more information about their company’s prospects (and more faith in the projections) than the market, so it’s rare when they do NOT feel that their company’s share price is undervalued. Usually, they are of the belief instead that the market is not properly accounting for whatever amazing strategy they’ve put into place or great news that they’ve announced. And frankly, if they think their share price is expensive, they should probably be working somewhere else.
Consequently, boards and senior management teams often judge treasury team performance short-sightedly by comparing the price of a share repurchase at execution to that of the current share price, basically benchmarking their decision ex-post against a then-unknown future. Evaluating treasury decisions using the same standards as a hedge fund can lead them to start acting like one, placing naked positions and taking on more risk. Instead, something like volume weighted average price or a similar execution performance benchmark would offer a far fairer standard.
It’s frustrating that treasury team is frequently held accountable for future events over which they exert almost no influence. Press coverage (featuring “finance experts” and finger pointers) basically say, “If you knew what the future stock price would be, would you have done this?” That is, they look at the execution price vs. the current price, even years after execution.
Not only is blaming the treasury team for not being able to predict future prices nonsense, it neglects a crucial part of the share repurchase process, the beliefs underlying the share repurchase decision. Basically, assessing the value created by looking at a price today vs. value at execution implies the far-fetched assumption that nothing material happened to the company during that period. And, if that’s the case, well, I think it’s pretty clear why the share price has dropped. And that has nothing to do with the treasury team.
What are your views on this? Is there a way to help clients through the share repurchase process? Email me at adrian.s.crockett@gmail.com.