Buy Back Shares, Then Issue More?
By
Brian Lawler
June 10, 2008
|
Last week, investors marveled at what seemed like temporary financial schizophrenia from American Oriental Bioengineering (NYSE: AOB).
On Monday, AOB announced it planned an up-to-$75 million stock buyback program. But it baffled investors less than 24 hours later by also disclosing plans to issue $125 million in convertible preferred stock in a private offering.
After shares of AOB fell as much as 11% on that news, the company pulled one more about-face. Citing "prevailing market conditions" that made the deal's terms unacceptable, AOB pulled the offering from the market.
Many investors might be confused about how a company could announce plans to spend cash to reduce its share count one day, then go begging for more funds the next. It may help to remember that the stock buyback plan is not mandatory. AOB can spend anywhere from zero dollars up to $75 million during the buyback period. Therefore, AOB's announcement of a buyback just before a financing, while odd timing, is not necessarily an inconsistent strategy.
At the end of the first quarter, AOB had $159 million in cash and equivalents on its balance sheet. In the past, it's used that cash to acquire smaller Chinese rivals and acquire new products -- a winning strategy for other consumer health-care companies like Chattem (Nasdaq: CHTT) and Johnson & Johnson (NYSE: JNJ).
Companies buy back shares all the time. Sometimes they do so for good reasons, sometimes not. While the timing of its buyback and financing plans was unique, that shouldn't change your opinion of AOB one way or the other, however you felt about it to begin with.
Closed for 15 months – opening 10 days only! Get notified ahead of time as our expert portfolio manager invests $1 MILLION in the best opportunities from across The Motley Fool’s premium investment services. This is the first open since August 2008, by invitation only. Enter email below.
Terms & Conditions
RSS Headlines
Fool UK