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Do as we say, not as we do. That's the feeling I get from PotashCorp (NYSE: POT ) management.
PotashCorp, as you know, was just offered a $130-per-share buyout from BHP Billiton (NYSE: BHP ) . Although 50% higher than what shares traded for in early July, PotashCorp has so far balked at the offer, calling it "grossly inadequate." CEO Bill Doyle gave an even more colorful elaboration: "I am not saying that we are opposed to a sale, but what I am saying is we are opposed to a steal of the company."
That's understandable and laudable. Management doesn't want to let go of the company for anything less than they think it's worth. Good for them! Let's have a round of applause for the fiduciary duty!
But I'm having trouble digesting these comments. This is hollow talk, if not a swift kick in the face for shareholders. If management truly feels PotashCorp is grossly undervalued at $130 a share, they have some explaining to do.
Remembering the past
This story starts in 2008, when PotashCorp spent $3.4 billion buying back its own stock at an average price of $147 a share. Late that year, with shares trading at around $160 a share, Doyle struck a tone similar to today, opining that, "We believe our shares are significantly undervalued versus our long-term potential." Bullish as ever, Potash fired up its buyback campaign, authorizing the repurchase of another 10% of shares outstanding.
And then everything stopped.
Since early 2009, PotashCorp has spent exactly zero dollars repurchasing shares, even while they traded as low as $64, and at an average of less than $100.
I think you see where this is going. If $130 a share is "grossly inadequate," and $147 was so cheap that spending a bloody fortune on repurchases was a wise use of capital, then why did management sit on its hands and refuse to repurchase a single share when they traded at a fraction of those values?
In a way, I get it: 2009 was a horrendously uncertain time for all companies. Hoarding cash was a universal response to net income plunging, as it did for PotashCorp. Fair enough.
But what little leeway we can give on this front is thoroughly overridden by the $8.9 million in option grants PotashCorp management received in 2009. Is there any sane defense for a company compensating managmenent with a currency trading far below the level management itself calls "grossly undervalued?"
Or, let me ask it this way: If accepting a buyout offer at $130 a share constitutes "stealing the company," then what is compensating management with option grants at prices far below that? Inquiring minds want to know.
If I'm being unfair to PotashCorp, it's only because this kind of capital misallocation is standard practice today.
Among all S&P 500 companies, share repurchases peaked in the third quarter of 2007, just as their share prices were topping, and bottomed 73% below peak levels in the second quarter of 2009, just as prices were hitting decade lows. I've shown that in the three years prior to the 2008 bailout, the seven largest banks, including Citigroup (NYSE: C ) , Bank of America (NYSE: BAC ) , JPMorgan Chase (NYSE: JPM ) , and American Express (NYSE: AXP ) , repurchased shares worth almost 60% of what they received in Troubled Asset Relief Program bailout money from taxpayers.
With almost perfect accuracy, companies have mastered the art of buying high and selling low.
Holding 'em accountable
It's only worth pointing out examples like PotashCorp because it's time investors start holding management accountable for their capital decisions. An appropriate way to think of this is treating CEOs like money managers when it comes to share buybacks. If a hedge fund manger were to habitually spend piles of money buying shares at market tops, and then hunker down during market bottoms while compensating himself by selling shares he publically proclaimed undervalued (the equivalent of PotashCorp's option grants), he would be out of business in seconds. Yet investors accept this behavior from CEOs as a given. Why?
If CEOs don't like the responsibility of being judged against the market's instability, maybe they should avoid the practice of buybacks and options grants altogether. Sticking with what they know -- which isn't forecasting the stock market -- is their real fiduciary duty to shareholders.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.