NEW YORK -- Analog chip companies are firing up their stock repurchase programs in an effort to increase shareholder value and boost the market’s long-term confidence in their financial viability.
Earlier this month, Intersil Corp.’s board authorized the repurchase of up to $50 million of the company’s common stock. MagnaChip Semiconductor Corp. and Volterra Corp. also recently said their boards approved an expansion of previously authorized share repurchase plans.
Now, MagnaChip can buy an additional $25 million of its common stock, bringing the maximum amount it can repurchase to $60 million. At the end of June, the Seoul-based company had already repurchased $28.8 million of its common stock.
Volterra recently acquired $1 million of its common stock, and was just authorized to increase its stock repurchase plan to $15 million. “We intend to increase our buyback activity going forward,” Mike Burns, chief financial officer of Volterra (Fremont, Calif.), said recently.
Analysts said the soft macroeconomic environment is weighing on analog chip companies’ income statements, and financial results and revenue guidance are coming in below Wall Street expectations. However, they still have significant cash flow, and given the low rate they can earn from their cash, repurchasing shares is a good use of capital.
“The cash balances are higher than you would need to sustain the business,” said Suji De Silva, an analyst at Think Equity in San Francisco.
At the end of the second quarter, Intersil’s cash and short term investments totaled $316.1 million; MagnaChip had approximately $161 million in cash; and Volterra, $146.8 million compared to $126.7 million last December.
It’s not only analog companies taking the step to shore up investor confidence. Xilinx Inc. also said this week that its board authorized the repurchase of up to $750 million of its common stock, or approximately 8 percent of its outstanding shares at the current stock price.
Academically, companies buy back their shares to increase shareholder value. But there could be other reasons, for instance, to prevent or make it harder for another company to take it over. I’m not at all suggesting that any of the companies mentioned in the article are acquisition targets, however. But it is something to think about. Also, semi companies are definitely being conservative with their R&D plans, and while the idea of using the cash to increase their engineering workforces and gear up for when the market returns to double-digit growth is one that would make sense, companies are still doing the opposite. And there are no indications (in the short-term anyway) that the trend will reverse itself in a big way.
The maxim "buy low; sell high" should also apply when buying back your own stock, but, tragically, it usually doesn't. Study after study have shown that stock buybacks usually occur at a stock price peak, rather than at a nadir. If the stocks are so undervalued now, why weren't they even more undervalued at the stock market bottom, and why didn't you buy then instead of now?
I don't know the math behind repurchase, but some companies did that before while there was no sign of advantage at all, at least from their stock price.
I think if the company is strong in cash flow, the better way to spend the money is to further invest on human capital (recruit more talents) and acquire good value companies.
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