Hewitt (HEW): When a Share Buyback Should be Viewed as a Warning
As promised, we have started taking a second look at Hewitt Associates (HEW). But first, as we had not previously written about this here at Stock Market Beat, we’ll review one of the reasons we avoided the stock in the past.
In February, 2005, Hewitt announced a Dutch Auction share repurchase for up to $300 million worth of securities. At the time, that amounted to roughly 10 percent of the market value. Investors could request any amount between $29.00 and $31.50 per share for their holdings. On March 16th, 2005 the company was to tally the auction results, and pay a single clearing price – that clearing price would be the amount at which the company could buy the maximum number of shares for $300 million, subject to the investor being willing to accept that amount or less. As the following chart shows, the stock immediately rose from the low end of the offered range to the high end on the announcement.
Many investors view share buybacks as a positive sign – an indication that management believes the shares are undervalued. However, those who read the details of this offering would discover an unusual provision: the offer was open to holders of all three classes (A, B and C) of stock. The B and C classes were shares are supervoting shares owned by current employees. When sold, they are automatically converted into A shares. At the time of the offering, B and C shareholders were restricted from selling shares; however, the tender offer waived those restrictions.
Fast forward to the offer’s expiration. The company issued a press release that stated, in part:
Based on a final count by the depositary for the tender offer, an aggregate of 24,275,504 shares were properly tendered and not withdrawn at $29.00 per share (15,630,253 Class A shares, 8,645,251 Class B shares and zero Class C shares). The Company has accepted for purchase and will promptly pay $29.00 per share for 10,344,826 of these shares, including all “odd lots” properly tendered at the $29.00 purchase price. The Company has been informed by the depositary for the tender offer that the final proration factor to be applied to non-odd lot shares is 42.59%.
In English, this meant that more than enough shareholders were willing to accept the lowest price offered them – even though many of these shareholders could have sold at the time of the announcement for $2 more per share. So many were willing to accept $29.00 that the company was able to repurchase less than half of the shares offered. The share price immediately fell, and kept falling. In early May, 2005, the company announced disappointing earnings and the shares fell all the way to $24.00.
After the earnings miss, the stock recovered. At the time our thinking was if that many investors, including a large number of employees, were willing to accept $29 per share in March, that is the maximum price we expect the stock to trade at for some time. As the chart shows, this proved to be the case. The shares brushed against $29 in late summer 2005, then earlier this year went briefly above $30. But both times the shares sold off quickly afterward, likely from investors who had missed out on the first opportunity taking their chance to sell.
Today the issue of whether this overhang remains is moot. At $21 per share today’s buyers are not likely concerned about whether employees would like to sell for $29. But two lessons remain: not all share buybacks are equal, and always read the SEC filings.
Like this article? Why not try out:
