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IN DEPTH: Why companies shouldn't back out of share buybacks - Daily News Egypt

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IN DEPTH: Why companies shouldn't back out of share buybacks

CAIRO: Over the past few months, a growing number of Egyptian companies have purchased or announced plans to buy treasury stocks. Given the current economic environment, and the fiercely fluctuating markets, the move is both strategic and rational – but unfulfilling the promise is worrying to investors. Treasury stocks (a.k.a. reacquired stock or stock repurchase) …


CAIRO: Over the past few months, a growing number of Egyptian companies have purchased or announced plans to buy treasury stocks.

Given the current economic environment, and the fiercely fluctuating markets, the move is both strategic and rational – but unfulfilling the promise is worrying to investors.

Treasury stocks (a.k.a. reacquired stock or stock repurchase) are stocks that the issuing company buys back, reducing the amount of outstanding stock on the open market and ideally keeping the stock price at an accurate level.

Common wisdom says this step reflects positively on investor confidence, except when companies fail to fulfill the announced buyback plan.

Companies generally decide to buy back their own stocks in times of economic downturn, when they feel the stock is undervalued on the market and does not reflect the company’s performance.

“This method [share buyback] is regulated by market authorities, and is common now in stock markets globally considering the international recession. Some governments tend to encourage this method by offering tax cuts to companies [buying treasury stocks] in order to help stabilizing the market, Hussein Essa, dean of the faculty of commerce at Ain Shams University, said.

Egypt’s Capital Market Authority (CMA) recently published on its online portal an investor’s guide to dealing with treasury stocks, explaining why and how companies repurchase stocks, the regulations that control the process and the accounting rules used to buyback and resell these stocks.

According to the guide, one of the reasons companies decide to buy back their stocks is “to invest available liquidity . an alternative for dividends. Companies also expect the offering to drive stocks price up and to increase the traded volume.

At the same time, the company may use a share buyback offer as a hint to investors that the stock is undervalued, thereby raising its price to offset poor performance, the guide warned.

As more and more companies consider the option of buying treasury stocks, making the announcement weeks in advance, a heated debate has ensued among investors who are skeptical of companies’ seriousness to buy back shares.

Unfulfilled promises

Investors gave several examples of companies that did not fulfill their buyback offer or bought a small percentage of what they had announced.

“We feel that we are trapped by some companies which announce buyback offers because their aim is to raise the traded volume on their stocks. At the end of the [announced] buying periods, several companies did not fulfill the offer or did so only partially, which creates an atmosphere of disappointment among investors, said Osama El-Kholy, 42, who has invested in the Egyptian stock market for the last 10 years.

“The CMA is aware of some attempts to manipulate the market through treasury stock buying offers and that is why the CMA set strict regulations to deal with such practices, said Hesham Ibrahim, chief of the staff at CMA.

While Ibrahim did not recall the last complain the CMA received concerning a treasury stock buying offer, he said these complaints are taken seriously and an investigation is opened right away.

When companies do not fulfill the announced buyback plan, they have to officially document the reasons at the CMA.

For example, when Lecico did not buy back the total number of shares as initially announced in February, it cited the “unavailability of stocks and said they were satisfied with the number of shares they had already bought.

Orascom Construction Industries (OCI) announced on Jan. 19 that it would buy 2 million treasury stocks. By Feb. 18, at the end of the set period, OCI had bought only 25 percent of that amount. The company attributed this to “the stability in the recent period, which made the company “prefer not to sway the price and choose non-interference policy during that period . and not to disturb the price stability, read a statement on the stock exchange website.

Waleed Ibrahim, of investor relations at OCI, told Daily News Egypt in a phone interview: “OCI in September 2008 announced it will buy 10 million stocks within several buying periods and the reason for not fulfilling the offer is already explained in the mentioned statement.

Egyptian appliance maker Olympic Group has bought back 1 million of its own shares, the amount it was seeking, for LE 14.5 million ($2.6 million), the stock exchange said on Monday. The firm’s chief financial officer said at the time Olympic had decided to wait for prices to drop.

On the same day, Pioneers Holding said it plans to buy back up to 12.8 million of its own shares in a one-month period starting March 25, the stock exchange said on Tuesday.

Investors will wait and see if and when this offer is fulfilled. Either way, Essa said, companies are responsible for explaining “the reasons for not buying or buying a certain number [of treasury stocks], and this should be well justified, otherwise it will reflect on the credibility of the company among investors.

“It doesn’t help cement confidence in the market, which is the last thing investors in the Egyptian stock market need, said El-Kholy.

Topics: FJP

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