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Source: New England Tech Stock Index/Bentley University
Friday, December 12, 2008
Bad timing means some company coffers are full of weaker stock, less cash
By Galen Moore
How is the economic crisis affecting tech companies?
Last winter seemed like a great time to start a stock buyback. Talk of recession had share prices down, and companies with confidence in their business were eager to spend spare cash on what they perceived as a value buy.
As the cold weather returns, many of those companies are heading into 2009 with less cash on hand than they had when they started 2008. In exchange, their treasuries are full of company stock worth half of what they paid for it.
Across the New England Tech Stock Index (NETSI), which tracks the region’s public technology, defense and life sciences companies, 39 firms have gone in for stock buybacks in the past three quarters. A third of them reported their cash on hand down by 20 percent or more since the beginning of the year.
Exact losses are hard to measure without a deal-by-deal analysis of the companies’ buyback programs. However, only five of the 39 escaped with share price drops less than 20 percent from the beginning of 2008 to Monday’s close.
“There are companies out there that used a huge chunk of their cash to make acquisitions recently, or they bought back their stock at two or three times its current level. Now that the time is finally right, they can’t do a buyback,” said Mark Murphy, a Piper Jaffray Companies analyst who follows Novell Inc. “They’re looking and saying, ‘Is this Armageddon? Is it the Great Depression, Part II?’ What exactly are they sinking into here? So they’re retrenching when ideally they should be doing the opposite.”
Video software maker Avid Technology Inc. completed a $100 million buyback plan in the first quarter of calendar 2008. “We were carrying quite a bit of cash at that point and thought it would be a good use of the cash at that time,” said corporate treasurer John LaMountain.
The company now has $122.4 million in its cash reserves — a 45.5 percent drop from the $224.5 million it held at the end of 2007. LaMountain and investor relations director Tom Fitzsimmons said they believe that is still a comfortable number for the company, which reported 2007 revenue of $929.7 million and carries no debt. The company’s recent $35 million sale of its SoftImage division should improve its cash position for Q4 2008, LaMountain said.
Like many companies, Avid’s buybacks appear to be on hold for now. Avid’s board of directors approved a second $100 million buyback program in February. To date, the company has spent only $20 million of that, LaMountain said.
Good time to buy?
Buybacks mushroomed in early 2008 following the U.S. Securities and Exchange Commission rollback of restrictions on such deals in an effort to promote market liquidity. Stocks appeared to be devalued, and buyback programs appeared to be a good opportunity to generate value for investors.
The NETSI, a joint project of Mass High Tech and Bentley University’s Hughey Center for Financial Services, showed net repurchase of company stock spread across most sectors of the New England tech economy. The net figures took into account stock-based employee compensation and other forms of stock sales.
One exception to the movement was the biotech sector, where only nine out of 42 companies had spent cash on their own stock in the past three quarters. Among those, Cambridge-based Alkermes Inc. was the only firm to show a significant drop in cash on hand. The company did not return calls seeking comment.
Buybacks are a sound use of extra cash almost anytime, said Philip Ianniello, a principal at the New York-based investment bank Needham & Co. All the same, many companies are wishing they’d waited, he said. On the other side of that coin, basement share prices make buybacks more attractive for companies that have cash now, he said.
“The number of (buyback deal) conversations has quadrupled in the past three months,” Iannello said. If markets continue to shrink in a down economy, companies with relatively secure revenue streams may in fact repurchase stock with one hand while they lay off employees with the other, he said.
But analysts that follow New England tech companies said a wait-and-see policy may be best for companies contemplating new buybacks.
“You better have enough cash on hand that you can run your company for the next two years,” said Avian Securities LLC telecom analyst Catharine Trebnick. “And if you can’t, you shouldn’t be buying back stock.”
Trebnick follows Airvana Inc. and Acme Packet Inc., which had buybacks in the past year. In those cases, the companies’ cash on hand remains comfortable, she said.
What constitutes a comfortable cash level depends on a company’s size and profit margin, said Murphy of Piper Jaffray. With more than $1 billion in cash on hand reported, Waltham-based midcap software company Novell has a year’s worth of revenue under the mattress, and may even be overcapitalized at this point, he said, suggesting most midcap companies should maintain at least half a year’s worth of revenue.
Novell’s stock buyback program has been a conservative one so far, designed to maintain value for shareholders as the company disburses stock-based compensation to employees, said CFO Dana Russell. But Russell acknowledged the company is feeling pressure from its shareholders to spend the cash it holds. In today’s interest market, cash earns only 1 to 2 percent, he pointed out. “People don’t invest in companies like Novell to get a 1 or 2 percent return,” he said.
Defense firms fight off the stock buyback slump
Brendan Lynch, Staff Writer
A few New England defense technology companies have continued to buy back millions of dollars worth of their stock while many other tech companies hit the brakes on buyback programs.
Many local tech companies have scaled back or reversed their stock repurchases before their last quarterly SEC filing. Local defense companies Raytheon Co., American Science and Engineering Inc. and KVH Industries Inc. have bucked that trend in three distinct ways: by ramping up buybacks while stock prices drop and cash on hand increases; maintaining buybacks while share value and cash drop; or ending net buyback while watching cash dip and bounce back, and stock soar more than 20 percent.
Most notably, Waltham-based defense giant Raytheon has steadily increased its net buyback from $273 million in the first quarter ending in March, to $311 million in the second quarter ending in June, to $324 million at the end of the quarter in September. Over that time, the company’s stock price has dipped from $56.28 per share to $53.51 to $50.93. The company’s cash on hand has increased from $2.3 billion to $2.6 billion to $2.8 billion despite that increase in buyback spending and the dip in its stock price.
Raytheon spokesman Jon Kasle said the defense integrator sees buybacks as a way of increasing shareholder value. In October, Raytheon announced its board had authorized the repurchase of an additional $2 billion of its stock. Kasle also said the company’s repurchase activity was part of a strategy in recent years focused on clearing away $13 billion in debt.
“This new (stock buyback) authorization demonstrated our solid financial position and balanced approach to capital deployment,” Kasle said.
American Science and Engineering in Billerica, on the other hand, reversed course before the end of its third quarter. In the first quarter, the imaging technology company bought a net total of $11.3 million in stock and two quarters ago it bought a net of $10.6 million. In the third quarter ended in September, AS&E reversed, selling a net $1.1 million in stock.
From the first to second quarters, AS&E’s cash on hand dipped from $125.4 million to $89.2 million before bouncing back up to $105.7 million. Meanwhile its stock jumped from Q1 to Q3 — from $51.53 per share to $72.97. During that timeframe, the company brought in at least $169 million in 13 orders for its X-ray screening systems from U.S. and foreign government agencies.
In Middleton, R.I., location technology company KVH has maintained its net buyback with minimal fluctuation — from $1 million in the first quarter to $2.5 million to $1.5 million at the end of September. Over that time, the company’s cash on hand has dipped slightly, from $51.4 million to $49.4 million.
Marc Songini contributed to this article.
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