In the 10 years to 2009, companies listed on the JSE raised R776.7 billion through rights issues. More than half of this amount was used for the acquisition of assets in major transactions such as dual-listed SAB’s acquisition of US beer group Miller in 2002.
Over the same 10 years, research suggests that companies listed on the JSE paid out about R500bn to shareholders in the form of dividends and share repurchases. The figures reflect how effective the JSE is as a marketplace for companies to receive money from investors and, almost equally, to pump it back out to investors.
This is more or less what a share market is expected to do. The ability to pump money out to shareholders was restricted to dividend payments until 1999, when the Companies Act was amended to allow companies to buy back their own shares. As a result of this amendment the level of payments to investors has reached historic highs.
Share repurchases, which have been described by one academic as a form of partial liquidation, are in theory motivated by a number of benign factors, chief of which is that the market price of the share is below the intrinsic value of the share. Given the considerable difficulty of establishing the intrinsic value, this essentially means that the market price is regarded as cheap by the executives who decide share repurchasing is an appropriate strategy.
Whether or not the market price appears cheap might be influenced by factors such as the number of share options held by the decision-maker as part of a share remuneration scheme or even the desire to lift the earnings a share figure. Or it could be that the decision-maker believes there is little opportunity for organic or acquisitive growth, and so the company’s cash resources would be best spent by acquiring shares in the company that management knows best, namely their own company, whose share happens to be trading at a discount to its intrinsic value.
The difficulty in drawing any firm conclusions about the motivation for share repurchasing is attributable to the dismal levels of disclosure required on the subject. In the absence of any useful disclosure, investors and analysts seem to assume that all repurchasing is being done on the basis of the theoretically sound reason that the share is trading at a discount and the company has excess cash.
This assumption overlooks the critical fact that share repurchasing is all about the share price and a company’s share price tends to be a sensitive matter for company executives, who have share options and who generally believe a strengthening share price reflects well on them.
The authority to repurchase essentially provides management with a substantial kitty with which it can manipulate the share price and, given the current disclosure requirements, do so without shareholders being aware.
Research by Nicolene Wesson and Willie Hamman of Stellenbosch University Business School raises serious questions about the assumption that repurchasing is done when a weak share price creates a value-enhancing share purchase opportunity. The research reveals that share repurchasing was increasing between 2004 and 2008 as the JSE was moving to higher levels. This reflects the reality that the primary influence on the decision to repurchase is likely to be the amount of cash on a company’s balance sheet.
The research also highlights the difficulty of identifying the extent to which companies are repurchasing their shares. Wesson argues that ahead of the recently implemented amendments to JSE regulations, even institutional investors will have struggled to work out how many shares a company has repurchased. “The number of shares may have reduced but it is difficult to determine whether this is entirely due to repurchases or is the net result of a combination of repurchases and rights issues.”
Wesson contends that, although an improvement, the proposed JSE amendments will not provide sufficient information for shareholders to make an informed decision on whether or not to support a repurchase programme.
To date, despite the enormous sums involved and the potential conflicts of interest, institutional shareholders have generally been willing to vote in favour of the resolutions that are put to shareholders at each annual general meeting. Only in extreme cases, such as Anglo American, has the support of some shareholders been withheld, but not before tens of billions of rands of value were destroyed.
Other known value-destroying share repurchases include Telkom, Super Group and Sun International. Some of the known value-enhancing repurchases include Sanlam, British American Tobacco and BHP Billiton.