ACS Buyback Isn't Bringing Out Believers

A rally off its 52-week low has failed to wipe out investors' apathy.
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SAN FRANCISCO --

Affiliated Computer Services'

(ACS)

new $1 billion buyback plan didn't generate much love from investors, and Tuesday's rally off a recent 52-week low hasn't erased traders' apathy after a failed buyout and questions about the company's future.

ACS shares opened moderately higher on Monday following the buyback announcement, but quickly relinquished their gains and fell with the rest of the market. Similarly echoing the market on Tuesday, the stock was recently up 2.8% to $41.97.

Earlier Tuesday, Stifel Nicolaus upgraded the stock to buy from hold on valuation, saying the stock now had an attractive fundamental upside potential, as well as continuing to be an attractive buyout candidate.

ACS' buyback strategy goes some distance in appeasing shareholders for the collapse of a buyout that would have richly rewarded them. Management dithered in negotiating with private-equity suitor Cerberus Capital Management, and botched attempts to solicit a better offer.

The resulting uncertainty over the company's future decimated the "buyout premium" that had pushed up the company's stock to nearly $62 from about $50 where it started the year.

In light of this, the buyback appears aimed at engaging investors whose spirits have fallen along with the value of their shares. ACS has just $250 million in cash on its balance sheet. That hardly supports a case that it has too much money sitting idly in its coffers, which sometimes triggers a buyback.

And the company isn't facing an activist investor looking to restructure the company's finances, as Carl Icahn did at

Motorola

(MOT)

and

TimeWarner

(TWX)

.

The buyback may also be an olive branch to shareholders who have endured a stock options backdating scandal, management's persistent refusal to discuss the buyout negotiations and compensation agreements with chairman and founder Darwin Deason that shareholder advocates have called questionable.

ACS has provided few details about the buybacks, and declined to discuss its motivation. According to a statement, ACS will spend $200 million on immediate share repurchases.

But additional buybacks under the $1 billion authorization will take place as cash and debt levels allow, and provided more promising investment opportunities don't arise, according a company statement.

ACS also declined to discuss whether it would finance the buybacks with new debt or cash on hand.

A more significant move to engage shareholders would be to explain how management's growth plans will resuscitate the stock and better serve shareholder interests than selling the company for cash that could have been put to use in other investments.

"Their argument to shareholders would be, 'stick with me and give my plans a chance to bear fruit,'" says Kent Hughes, managing director of shareholder advisory Egan-Jones. That would show that management's decision to remain independent was part of a well-reasoned plan to improve shareholder returns through continued growth, rather than an attempt to hold on to their jobs.

ACS Chief Executive Lynn Blodgett began laying the groundwork to make a case for keeping the company independent. Shortly after Cerberus first approached ACS in March, Blodgett issued an ambitious goal of doubling revenue to $10 billion by 2010, and appointed his own slate of officers to guide the company in that direction.

But neither he nor the board has publicly discussed the buyout negotiations despite calls for information from its largest investors, OppenheimerFunds and Pzena Investment Management.

Without more insight into the way management handled the buyout, investors have little information with which to credit management's reasons for not accepting an offer, or to determine whether they are better served by keeping ACS independent.