Don't Believe What You Read About Buybacks

Marek Fuchs

Picture for a moment the Business Press Maven running a public company. For convenience sake, let's call it Lamebrain Business Media Stenographers (LBMS), and imagine we're at a public meeting. There, I announce a share buyback plan -- $800 million worth -- and look down from the dais to see business reporters, those cute little gullibles, scribbling approvingly in their notebooks. I know just what they are going to report and, as such, begin to laugh so hard that my CFO eventually has to slap me back to consciousness.

Here's what the dutiful scribes are going to report:

"Shortly before laughing convulsively, The Business Press Maven announced that his company, Lamebrain Business Media Stenographers, would buy back up to $800 million of its shares."

Now, tell me why it misinforms investors.

I'll give you a quick hint. When The Business Press Maven makes sharp, keen comments about how the business media has a distant relationship to numbers, I don't really mean that they can't add two plus two. Basic arithmetic is not quite beyond them.

But what binds them up consistently is something every astute investor always has to be on the lookout for: The business media, on measure, simply do not understand that to derive meaning from one number, it must often be seen in relation to another.

Just over a week ago, for example, we saw how the business media, en masse, reported that Rupert Murdoch had offered the Bancroft family a seat on the Dow Jones(DJ Quote) board, as if that alone meant something.

But as I pointed out in a typical state of righteous rage, an investor can only determine how good or bad such an offer is if they can see this offer of a single board seat in relation to how many are on the board in total. If there are, for example, a half dozen seats on the News Corp. board, there is a chance that this one will have influence, so it's a pretty good offer to dangle. If there are two dozen, not so good.

But, as is their habit, the best and brightest of the business media did not tell us this tidbit. They just don't have that rudimentary sense that every investor must have: Numbers gain meaning only when set beside other relevant numbers.

That brings us back to the key question around LBMS' announcement of that $800 million buyback. How many shares are outstanding?! In other words, without knowing the proportion of outstanding shares the announced buyback entails, what the business media are telling us has all the use of a tub of sea jelly.

But look all around you in recent weeks -- or at any point in time. Almost every time, the only item that is reported is the raw size of the announced buyback.

A recent hunk of nonsense from Reuters:

After the close, shares of Intuit rose 3.5 percent, to $28.68, in extended trade after the maker of tax preparation software reported quarterly earnings that topped Wall Street expectations and said it would buy back up to $800 million of its shares over the next three years.

A similar hunk from today's Wall Street Journal:

UBS will put the proceeds toward buying back shares within a previously announced program worth up to eight billion Swiss francs, the bank said.

More, also from today's WSJ, doing a poor job explaining one of Thursday's biggest stock market gainers:

Toro rose 3.53, or 6.5%, to 57.95, in the top five among New York Stock Exchange percentage gainers. The lawnmower and snow-blower maker reported fiscal second-quarter net income rose 7%, and said its board authorized the buyback of as many as three million shares.

Was the excitement warranted? Only the Shadow knows.

The irony, of course, is that the information is available at reporters' fingertips, and some -- even those who also report share buybacks with such imbecilic incompleteness -- know how to do it the right way. Just look at the last paragraph on this recent article about Merrill Lynch(MER Quote) by Reuters, which messed up the Intuit story.

	Can you name a company that recently announced a share buyback that is big in relation to its total shares outstanding? Answer Here

This time, in good service to investors, Reuters wrote:

Based on Friday's close of $90.11, the most recent $6 billion authorization could buy back about 66.6 million shares, or nearly 8 percent of the average basic number of shares listed in its most recent quarterly results.

Impressive, huh? The reporter provided one number in relation to another, giving it actual meaning.

Of course, there was another reason The Business Press Maven was honking and snorting when he made his fictitious announcement of a share buyback. Can you divine it?

I'll give you a quick hint. Heck, I'll just tell you outright. Although stocks often run on buyout announcements, how often do you see consistent follow-up on how much of the announced buyback was ever completed? Especially with those crafty words they use like, "we'll buy up to" or "as much as." Those verbal formulations often turn out to mean much less.

---