Notable letters to companies with lots of cash are calling for restructuring and also cash back.
You know when Ralph Nader takes it upon himself to write a letter to Cisco’s John Chambers complaing about the company’s performance that shareholders everywhere are getting restless. This was bound to happen what with all the news about companies holding tons of cash at home and abroad (from where they’re lobbying to return it with a tax holiday).
Mr. Nader, former presidential candidate and author of “Unsafe at Any Speed,” in late June took Cisco CEO to task for doing nothing to boost the sagging stock price. He also said a “Cisco shareholder revolt against a management” was long overdue.
A few weeks earlier an unidentified Microsoft shareholder – a hedge fund with 11mn shares – wrote a letter calling for a near complete overhaul of the company’s capital structure. The letter, which appeared on businessinsider.com, offered a well articulated strategy aimed at returning capital to shareholders.
We recommend that Microsoft take the following steps to greatly enhance shareholder value: 1) issue $40bn of debt (targeting net debt on the balance sheet of zero); 2) use net proceeds from the debt offering to conduct an aggressive one-time share buyback; 3) use 100 percent of ongoing domestic free cash flow of $10bn for payment of common dividends; and 4) borrow against ongoing international free cash flow of $15 billion to buy back shares each year. We estimate this recapitalization would enable the company to repurchase approximately 20 percent of its shares outstanding today, increase the annual dividend to $1.48 per share (6 percent yield based on current stock price), and buy back up to 9 percent of the shares outstanding each year (depending on price of buyback).
Add to these reports of activist investors stepping up the pressure on military contractors and news out today that legendary activist Carl Icahn wants to acquire Clorox, a company of which he is the largest investor.
Getting results. Some of this activism could be having an impact. S&P recently reported a big increase in share buybacks in the first half of 2011. According to news reports, S&P said buyback activity rose 63 percent from January to June. But actually many companies, despite the pressure to do so, have already learned that they’re better off returning more cash to shareholders from a risk standpoint.
They’re also learning to be more transparent in what they do with the cash. IBM, for one, has been proactive in showing what it is doing and what’s to be gained from being very transparent about shareholder distribution. It’s also forthcoming in laying out its performance goals.
Not the only avenue. Still, buybacks aren’t the only solution to appeasing activists. Dividends are also popular, as seen in the results of a pre-meeting survey of The NeuGroup’s T30-2, which just met in June. In that survey, most respondents, or 54 percent, said they had an increased appetite for dividend payouts in the last two years, whereas the appetite for share buybacks had only increased for about 38 percent of members. Share buybacks also were most often funded using onshore free cash flow or commercial paper issuance, according to T30-2 members.
Interestingly, some treasurers see buybacks and issuing, or increasing, dividends with excess cash as a cop out. “Dividend and share buybacks reflect the inability of management to find better uses of cash,” said one T30-2 member. At the same time, she said, having the surplus at all increased the “likelihood of spending money poorly.”