Maximizing Shareholder Value Pert 2

The first step in the company’s strategic shift to ‘Maximizing Shareholder Value’ is the manipulation of the company’s financials.  Stock price can most easily be affected by direct manipulation of the factors that control price. 

The first thing the company did was to announce a huge stock buy back program.  They actually borrowed money to buy back shares of their own stock.  By having more money chasing fewer shares, the price of those shares remaining has to go up. 

Simple supply and demand, increase the demand for shares by flooding the market with ‘buy’ orders while limiting the supply of shares you offer and you have higher prices.

The next step was to increase the dividend.  By paying back more money to shareholders through dividends, the shares themselves have more value and therefore trade at higher prices. 

Short term this is great for the stock price, long term, not so much.  What the company is doing is openly admitting that they can’t think of anything to do with retained earnings that will make the company more valuable. Rather than risk trying to invest the money the company has back into the company, they have decided that the best course of action is to give the money back to shareholders. 

What the company is saying is in essence, “Our organization is so screwed up that we don’t even want to try and fix it. We are afraid that any money we spend trying to get our company to run better would be wasted, so we would rather just give the money back to you and ride this thing all the way into the ground”. 

That is great for shareholders and really great for executives and board members whose compensation is tied directly to share price.

It is not so good for everyday employees who now have to worry that the company the where they have worked for so long might not be here in a couple of years, but hey, that’s the way modern capitalism in our market based society works.  

Bad company management, good maximization of shareholder value. 

Rather than trying to make money for shareholders off of what they have invested, the company is simply going to give the money back and hope that we can give it back fast enough that the share price keeps rising. 

And it worked, the share price shot up 60% in a few months.  Wall Street loves a good deal and giving back money to shareholders with a little something added on from the sale of the company’s future is a good deal on Wall Street.

It doesn’t matter that the company has hindered its ability to function in a tough competitive market.  It doesn’t matter that they will have no “War Chest” to rely on if another jolt comes to the economy or the market they are in.  It doesn’t matter that they have sold off the company’s future for a better stock price today, because a better stock price today is all that matters when you are maximizing shareholder value.      

Combined with the buying back of stock and the increases in dividends is the manipulation of earnings per share.  Hitting specific earnings numbers has become more important than how those earnings are…well…..earned.  

For the next couple of quarters and perhaps the next couple of years, my company will be achieving earnings growth through the manipulation of the internal numbers of the company rather than through real growth or acquisition.  Reduce the number of shares outstanding and you can achieve growth in Earnings Per share.  (Less shares divided into the same amount of earnings gives you greater per share earnings growth.).

Lower expenses faster than sales decline and you achieve earnings growth.  Limiting the amount of inventory you carry and you have more money to add to the earnings line on the balance sheet.  The fact that you can’t sell what you don’t have won’t show up for at least a few more quarters.  Between now and then you can try to find another way to get the earnings up. 

Then there is the cutting back of pay and benefits for employees.  That has a similar effect on earnings and it is not as noticeable to share holders as when you close a number of stores and throw people out into the street.  By limiting what an employee can earn and reducing what they cost for the company you can improve earnings.  Again, the results of these changes will not show up for a while so you take the earnings increase now, get that reflected in higher share prices and worry about the downside effects of the decision at some later date. 

This and a myriad of other accounting manipulations are going on in my company on a daily basis.  It is the first prong of the strategy to increase Shareholder Value and its effect on share price has been incredibly positive. So far, so good, as far as shareholder value is concerned.