Greenberg: Why ADT Is Appalling
The company said its customer growth in its fiscal first quarter, ended Dec. 27, didn't meet its expectations and that it has "implemented actions, including improvements in our dealer channel and lead generation process, to regain subscriber traction in the future."
Here's the problem: Over the past year, rather than investing more cash in its business than it otherwise might have, ADT has spent billions buying back shares at prices well above where the stock now trades -- with the distortion even greater in the wake of today's earnings miss.
That highlights a problem with buybacks, in general: They're often designed to give a short-term pop in the stock to assuage antsy investors. They're also often the tool of first resort when activists land on a company's doorstep, which was the case with ADT.
Must Read: Greenberg: Why Neustar Is Falling
And, as is the case with ADT, the result can often be short-term gain for long-term pain.
A little history here: In early October 2012 ADT was spun off from Tyco (TYC). Later that month Keith Meister of the hedge fund, Corvex Management, filed that his fund held a 5% stake in ADT. At the same time he gave a presentation saying he thought the stock was valued at $61 and he urged the company to raise debt and buy back its shares.
Within weeks (you'll never guess!) ADT's board authorized a three-year, $2 billion buyback.
A month later Meister was appointed to ADT's board.
ADT's stock, meanwhile, zoomed higher, peaking at nearly $50 in March 2013 on the hoopla and the start of buybacks.
According to ADT's most recent 10-K:
During fiscal year 2013, we made open market repurchases of 15.5 million shares of our common stock at an average price of $43.01 per share. The total cost of open market repurchases for fiscal year 2013 was approximately $668 million, of which $635 million was paid during the period. Additionally, between September 28, 2013 and November 13, 2013 we repurchased 7.3 million shares of our common stock for approximately $300 million.
On January 29, 2013, we entered into an accelerated share repurchase agreement under which we repurchased 12.6 million shares of our common stock for $600 million at an average price of $47.60 per share. This accelerated share repurchase program, which was funded with proceeds from the January 2013 Debt Offering, was completed on April 2, 2013.
Adding insult to injury, many of these purchases were, indeed, financed through debt offerings.
Fast-forward to Nov. 20, 2013, which is more than halfway through the company's fiscal first quarter: ADT announced that with its three-year buyback program completed in about a year, its board added another $1 billion to the buyback pot. On its earnings call today, the company says it spent $1.2 million on buybacks, including "the Corvex buyback."
Five days later, the company announced it was buying 10.24 million shares, or the bulk of Corvex's 11.1 million stake, for $44.01 per share. That's a far cry from his original $61 target. ADT also said that Meister was immediately exiting the board.
Enter today. With ADT's 16% decline after the punk earnings you can't help but wonder about two things: What investors who weren't bought out with Corvex must be thinking; and, given Meister's role on the board -- and the timing of Corvex's sudden exit -- did something he learned as a board member cause him to get out while the getting was good?
Corvex didn't return my call.
Reality Check: The headline to this piece says it all but ADT may very well go down as a classic example of activists gone wild. They buy a big stake. They go on the board. They get bought out. As I wrote a few months ago, it smacks of new-age greenmail.
More recently I questioned whether the SEC should clamp down on special deals for activists. The bottom-line is really simple: Should insiders, in this case activists who go on the board, get special treatment? I think we all know what the answer should be.
UPDATE: ADT sent the following response to my media inquiry:
1) The repurchase from Corvex of a large block of ADT common stock (almost 5%) allowed us to retire more than 10mm shares in one transaction at a set price (market price of Nov 22 closing), giving us speed and certainty of execution. This had an immediate beneficial impact on our EPS that was shared by all our shareholders.
2) Buying at the market price was the most fair and cost effective way for ADT to retire a large portion of our stock.
3) Additionally, repurchasing shares directly from Corvex enabled ADT to retire the shares without incurring transaction costs.
-- Written by Herb Greenberg