Thursday, May 17, 2007

Buyout Frenzy And Its Impact On Equity Prices

Today, both USA Today and The Wall Street Journal featured articles on the recent buyout activity and its impact on equity prices. One result of the buyout activity is the available supply of equities has been reduced. All else being equal, if demand remains unchanged, this same demand for a reduced supply of stock will cause equity prices to move higher.

According to the USA Today article:
  • There aren't 5,000 stocks anymore in the Dow Jones Wilshire 5000, a measure of the entire stock market. With fewer public companies, it has shrunk by 51 stocks, or 1%, this year and is down 89 stocks, or 2%, since 2005 to 4,910 now, Wilshire Associates says. There's no sign of the evaporation ending. "You're seeing a gradual shrinkage of the availability of public companies," says Richard Peterson of Thomson Financial.
  • And it's not just small companies going away. This year, 12 members of the S&P 500, a benchmark index of large-company stocks, have been taken out by private buyouts and acquisitions, says Howard Silverblatt of S&P. An additional 17, including Bausch & Lomb, will disappear once their buyouts are completed, he says.
  • Shares of remaining public companies become more valuable. Suddenly, stock investors have something the buyout firms want, putting a floor on their value, says Jack Ablin of Harris Private Bank. He estimates the dollar value of stocks available to the public has shrunk 6% the past year.
Related to stock buyouts is the impact stock buybacks are having on equity characteristics. In addition to buybacks reducing the supply of available equity, these buybacks are impacting the fundamentals of a company's financial results. Specifically, per share financial figures are being altered due to the large buyback activity. As companies report data on a per share basis, the reduction of outstanding shares for a particular company can enhance per share results. John Hussman of the Hussman Funds discusses this in a recent strategy article he wrote titled Double Counting.

In Hewlett Packard's recently released results, the company cites the favorable impact share buybacks had and will have on earnings per share results:
The company projected in February second-quarter earnings of 57 cents to 58 cents on roughly $24.5 billion in revenue. Excluding one-time costs, the company had forecast profit of between 63 cents and 64 cents per share for the quarter. Analysts expected earnings, on average, of 65 cents per share on $24.58 billion in revenue, according to a Thomson Financial survey. Higher levels of share buybacks during the quarter ending in April also contributed to the earnings lift, the company said (emphasis added).
As one analyzes companies, the impact of share buyback activity must be factored into the ratio analysis. The buyback activity is impacting the per share results of a company's per share financial figures.

Wave of buyouts shrinks public pools of stocks
USA Today
By: Matt Krantz
May 17, 2007

Taking Stock: How Buyouts Alter the S&P ($)
The Wall Street Journal
By: Justin Lahart
May 17, 2007

1 comment :

Richard Jennings said...

FYI - You can get free access to those articles through

That was in PC World and I thought it was an excellent tip.