On Global level, many of the
corporate are generating huge cash flow from their existing business. It's a
universal truth globally that business dynamics are so volatile that no one can
be assured of good days all the time. I must remind the time of Enron
bankruptcy, WorldCom meltdown, General Motors, IBM PC & Server Business,
Nokia, Alcatel, Sun Microsystem and More recently Yahoo whereas Facebook,
Google, SnapChat, Uber and many other took the center stage.
Most of the above company who
went underwater or faced heavy financial crisis and forced the government to
intervene and helped them financially to secure millions of associated job. At
the same time, we all are aware about that during the bubble time, these companies
made many of their employees billionaire.
There is a trend of stock option
which companies offer to their employees to retain them but ultimately dilute
the share more. It impact companies Earning per share in negative way. In
today's business environment, listed companies are under tremendous pressure to
meet the earnings growth forecast else their major chunk of market share gets
wiped out when sell off post dismal result.
Given above circumstances, I want
to discuss about the effective way to utilize the cash reserve by the
companies.
Buyback - Companies announce buybacks to buy their own share from
the open market. It reduce their floating share in the market and ultimately
impact the earning per share on the positive side. Many companies like Cisco, HP,
Dell , Sun Microsoft, Nokia did in the past and literally pumped in billions of
$ to ensure that they meet their EPS. What these companies are buying is
nothing but the additional share which goes to market when their vest out their
stock option. On the actual level once the number of floated share goes higher
these companies goes for buyback. The money is spent but companies are not
adding any additional revenue source. In case downturn happens then they get
trapped in financial problem.
Whereas
In Acquisition, Companies buys out competitor or companies from
different segment to diversify their portfolio. It add revenue stream to
company bottom line which in fact help company to meet EPS even though floating
share goes up post stock option initiated dilution. I want to give an example
of Oracle which acquired regularly and superceded many companies. At the same
time, they continue to increase their revenue and free cash flow and cleared
out even their debt which they took in some big acquisition
Microsoft announced $40 Billionbuyback at a time when their share price is running at $57 plus per share and
the market cap of around $447 Billion. In that scenario, they can only reduce 9
to 12% of the floating share. On a contrary look at their acquisition of Linkedin
in $26 Bn and we should be aware that Linkedin posses huge potential of
generating high margin operating profit and cash flow.
It's nothing but to make street
happy and meet EPS online so that Stock Option holder dont lose money
Sources: Market
watch
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