Companies Buying on the Cheap

Stock prices go down, stock repurchases go up; July may be record month. Elsewhere: Why some fast-growing companies may be ideal takeover targets. Plus: Accounting snags at Stagecoach, Neoforma.


With share prices still plummeting—and the summer heat on—it appears corporate managers have gone fishin’.

Actually, it’s more like bargain hunting. So far this year, publicly traded companies have announced plans to buy back at least $30 billion worth of stock, according to Trim Tabs, a company that specializes in tracking and analyzing stock market liquidity.

Last week alone, 30 companies announced plans to repurchase their stock. The total bill? $18.4 billion.

As a result, planned buybacks in July are expected to come close to the record $53.6 billion set last September, when many finance chiefs and CEOs were determined to reassure investors in the wake of the 9/11 terrorist attacks.

July seems to be a popular month for repurchasing stock. Last year, a record $237.6 billion worth of buybacks were announced, up from about $222 billion the prior year.

A number of high-profile companies have announced buybacks in recent weeks, including PepsiCo, Bank One, Home Depot, Citigroup, AIG, Procter & Gamble, and Pfizer.

“This share repurchase program reflects our great confidence in PepsiCo’s ability to continue generating strong, consistent cash flow,” said Steve Reinemund, PepsiCo’s chairman of the board and chief executive officer, when he announced Pepsi’s plans to repurchase 5 million shares.

Added Reinemund: “The fundamental health and vitality of our businesses allows us to invest in growth opportunities, pay a dividend, and buy back shares, all at the same time.” The PepsiCo plan was launched last Friday.

It was a similar story at The Home Depot when that company’s management launched a buyback plan on July 15.

“We believe strongly in the fundamental strength of The Home Depot,” said Bob Nardelli, chairman and CEO, when the home-improvement retailer announced plans to repurchase its stock. “This repurchase announcement is not only a vote of confidence in our business and our associates, but for our loyal shareholders as well.” Management at Home Depot plans to buy back up to $2 billion of company stock.

The Value of Valuations

Plummeting stock prices not only make buybacks attractive; they tend to encourage takeover attempts.

But remarkably, few finance chiefs at fast-growing companies have a good idea of what their businesses are worth. Or at least that’s the takeaway from the latest “Trendsetter Barometer” from accountancy PricewaterhouseCoopers. According to that yardstick, management teams at more than two-thirds of the fastest-growing companies in the United States don’t know the value of their operations.

Only 29 percent of the surveyed companies report having a current valuation. Of the rest, 9 percent are planning to have one completed in the next 12 months. About 15 percent noted they had conducted a valuation in the past, but indicated that it was no longer current. Fully 44 percent have no valuation—or no plans to obtain one.

Only 27 percent of technology companies have a current valuation, compared with 31 percent of nontech companies. Just 29 percent of service and product sector companies have a valuation.

“Current market conditions may have caused some of these high-potential companies to delay a valuation until business improves,” says Paul Weaver, global technology industry group leader for PwC. “Whether to sell a company, make a public offering, or exchange equity for capital, a current valuation is a strategic must.” (PwC offers valuation services.)

Interestingly, 25 percent of the CEOs surveyed have tried to sell their company at least once, either in its entirety (19 percent) or in part (6 percent), with most of these attempted sales (61 percent) occurring within the past two years.

Among the prospective sellers, only 48 percent have ever had a formal valuation, and only 33 percent have a current one.

“Entertaining momentous financial decisions without knowing the current value of the company is risky, and can result in equity and other financing transactions at below optimal levels for the owners,” said Weaver.

Weaver believes a formal valuation “is critical to understanding the factors that make the company valuable to an acquirer, and therefore what must be achieved, postintegration, to justify paying a specific price.”

According to the survey, companies planning new, first-time valuations appear to be attractive acquisition candidates.

On average, first-time valuers have grown nearly twice as large as their industry peers ($52 million in revenues versus $27.2 million).

Despite their larger size, these companies are also growing 31 percent faster than their rivals. The rate? 1,947 percent during the past five years for first-time valuers versus 1,482 percent for non-first-time valuers.

Among this group of first-time valuers, 54 percent are planning M&A activity, including a potential sale, in the next 12 months.

“Few business activities are more complex or risky as a sale or acquisition,” notes Weaver. “These companies planning their first valuation have growth superior to their peers, and many have a clear interest in combining with others.”

By his lights, Weaver believes the valuation process “will help them to better anticipate the many business issues that are likely to emerge in their transaction, and to more effectively prepare for negotiations.”

PwC’s “Trendsetter Barometer” interviewed CEOs of 407 product and service companies identified in the media as the fastest-growing U.S. businesses during the past five years. The surveyed companies range in size from approximately $5 million to $100 million in revenues.

Another Andersen Problem in Houston

Speaking of valuation woes: a U.K.-based transport company said there were “accounting irregularities” in its recently acquired U.S. business, according to The auditor for the Houston-based acquisition target? Arthur Andersen.

Management at Stagecoach said operating profits at its Coach USA division fell about 39 percent for the year ending June 30.

The report said that accounting irregularities at Coach USA played a part in a $628 million writedown incurred by Stagecoach after it acquired the bus company.

The problems at Coach USA came to light after an employee tip-off, according to the report.

“We were not happy when we bought Coach with the accounting that had gone on [before] our acquisition,” said Robert Speirs, Stagecoach’s acting nonexecutive chairman, according to

“We investigated further and we made relevant adjustments to bring their accounting in line with our own from the date that we acquired it,” he reportedly told “From that time, there were no accounting irregularities.”

Neoforma May Issue New Forms

It looks like managers at a lot of companies are starting to get nervous about skeletons in the accounting closet.

The latest example: management at Neoforma Inc. said it and its new auditor are reviewing two accounting matters relating to shares issued to strategic partners in July 2000. The review could result in the restatement of current and past financial results.

Management at Neoforma, a health-care information technology company, said its historical financial results reflect its original interpretation of these matters, which was reached in consultation with its previous auditors.

However, company management did not come out and say for sure whether there in fact will be a restatement. Neoforma management did add that its new auditors have been reviewing its accounting and business.

Neoforma noted it is reviewing its accounting treatment of stock grants to a few partners—Novation, VHA Inc., and University HealthSystem Consortium. “At this time, the company has not made a determination as to whether the accounting should be changed,” stated Neoforma management.

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