By: Herb Greenberg | 02/03/14 - 08:46 AM EST
I'm working on a piece about how ADT's (ADT) stock has fallen in the wake of its earnings miss -- and its comments that it has "implemented actions" to "regain subscriber traction." But this is the same company that spent money buying back billions of dollars in stock at prices well above its current price in a share repurchase program that was instituted after Corvex disclosed a 5% stake. Corvex then went on the board -- and then got bought out at a high price just before this bad news hit. The obvious question: Why was Corvex given special treatment, and as a board member what did they know prior to selling?ADT's response:
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.I appreciate their response, but my first reaction: Try telling that to all of the shareholders who didn't get special treatment. Reality: Had the company not bought the shares back from Corvex and had not been on the buyback campaign to end all buyback campaigns, its earnings per share would have fallen by 25% rather than 11%. Revenue growth of 3.7%, while above a year ago, is below the prior quarter and is nowhere near where the company (by it's own concession) wanted it to be. Why? Maybe they were spending too much money buying back shares instead of investing in the business. P.S.: I bought an ADT system a few months ago. I chose buying directly from the company rather than a dealer, because when I called the dealer, after getting a coupon in the mail, I felt I needed to shower when I got off the phone. The price from the company or the dealer was so low I would have been foolish not to take it. It was so much cheaper than anybody else's. They keypad they installed? I curse it every time I use it. Now, with these results, I know why. They're burning the furniture to keep the fire lit. Take a look at the balance sheet: Cash is tumbling while debt (to buy back shares, including Crovex's) is spiraling higher. Not the best combo -- low rates or no low rates. -- Written by Herb Greenberg in San Diego
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