Here is the inside scoop for buybacks, I have been part of it, and the scenario is a case of the financial theory doesn’t fit reality, because it allows for legalized corporate theft.
First, a company announces $X amount of a buy back. Lets make the math easy, $2M in buyback, 100,000 at $20 a share. The stock goes into the treasury account. Now if that is all that happened, investors would be fine. But that is not all that happens. Then the board of directors approves an incentive plan for the CEO of $1M of restricted stock 50,000 at $20 a share. The value of the award is posted as income to the CEO, and the cost of the award is the income tax rate, easy math, 30%. So now the CEO has $1M of stock at $20, the cost to the Company was $300,000, $6.67 per share, the taxes paid by the company.
The tax basis of the stock is $1M, or $20/sh. Cash out of pocket of CEO, $0.
So now the CEO sells the stock at $21, $1 taxable gain, $1* 50,000 sh = $50,000 taxable gain, tax 30% = $15,000, easily payable from the 1,050,000 proceeds. ROI, return on investment to the CEO, $1,035,000 / $15,000 = 6900%, or a legal minting of cash to insiders.
Note, the sale of the stock goes back into the public shares outstanding and the 100,000 share buyback is now only a 50,000 share buyback. Sorry equity holders, the CEO just extracted shareholder cash and made a mint off of it, and the value increase of the buyback was reduced by 50%
When Was I Radicalized? (Boeing edition) | Epsilon Theory
Here is the result of it in the real life case of Boeing, and other companies.
Caveat, I was NOT a CEO, my award in 2000 was like $80,000 or something like that, I don't remember exactly.
sportsguy