Oracle Blows Billions

There are two things we know about Oracle (Nasdaq: ORCL  ) CEO Larry Ellison:

  1. He prefers to deal in cash rather than equity when buying growth.
  2. He buys growth really, really well.

Ellison, you might say, is the opposite of Chesapeake Energy's (NYSE: CHK  ) Aubrey McClendon, who borrowed on margin to buy huge chunks of Chesapeake stock and was then forced to sell. (Whoops.)

Ellison and Oracle have no such designs. Rather, the database deacon's board this week said it would up its stock buyback program by $8 billion, presumably financed through free cash flow. (Oracle has produced $7.4 billion in FCF over the trailing 12 months.)

And now, the bad news ...
If there's a problem with Oracle's buyback, it's in the reasoning. Quoting from the company's 8-K disclosure form:

Oracle intends to use the additional authorization to repurchase its shares from time to time to offset the dilution created by shares issued under Oracle's stock option and employee stock purchase plans and to repurchase shares opportunistically. [Emphasis added.]

Offsetting dilution doesn't create value, sirs. Oracle, like Intel (Nasdaq: INTC  ) and Symantec (Nasdaq: SYMC  ) before it, is using my money to repurchase shares that would, if left on the balance sheet, reduce my claim on the cash flows of the business. Either way, cash isn't being returned to me.

I don't mind buybacks, Larry. I like that you're putting cash to work; it's one of the great strengths of your business. But if you have the capital, and you want to add value to me, as a shareholder, forget about offsetting dilution. Pay me a dividend instead.

Get your clicks with related Foolishness:

Fool contributor Tim Beyers recently returned from a tour of Silicon Valley with his Rule Breakers teammates, during which they visited more than a dozen established and emerging innovators. Care to learn more? Just tell us where to send you our updates. It's 100% free.

Tim owned shares of Oracle at the time of publication. Chesapeake Energy, Intel, and Symantec are Inside Value picks. Get access to all of Tim's Foolish writings here.

The Motley Fool's disclosure policy starts every morning with a good, strong cup of coffee. Please pass the milk and sugar.


Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 22, 2008, at 9:12 PM, uriahsw wrote:

    Hi Tim,

    Share buy backs and dividends increase the value of the company by the exact same amount. When you think about it, it's intuitively correct. If they have x dollars to spend on divideneds/sharebuyback then the value of the firm will increase by x dollars and so the shares will to.

    The only difference is the investors tax preference. For example, if most of your investors have high incomes, then the divideneds will be taxed at income tax amounts as opposed to capital gains tax amounts, and so your investors may prefer a share buy back. However, if most of them have low incomes, then the dividend could be taxed at less than the capital gains tax, and so it is better to distribute dividends.

    So really the decision to offer dividends or buy back shares, really comes down to which kind of investor you're looking to attract.

  • Report this Comment On October 23, 2008, at 4:04 PM, rfaramir wrote:

    uriahsw:

    Not just "which kind of investor you're looking to attract," but whom do you reward. Dividends reward those who hold your stock, buybacks reward those who no longer want to hold it (the cash only goes to those who choose to sell).

    This points to a conflict of interest: many of the sellers are WITHIN the company! If there are outstanding options in employees' hands, it is an unethical manipulation of the stock price to spend shareholder cash to buy shares from (and raising prices for) the option-exercisers.

    Tim:

    "Either way, cash isn't being returned to me.

    I don't mind buybacks, Larry. I like that you're putting cash to work; it's one of the great strengths of your business. But if you have the capital, and you want to add value to me, as a shareholder, forget about offsetting dilution. Pay me a dividend instead."

    I agree about the dividend, but I only like buybacks when there are NO OUTSTANDING OPTIONS! Then and only then are they roughly equivalent, just differing in tax consequences and what kind of investor gets the money.

  • Report this Comment On October 23, 2008, at 8:48 PM, uriahsw wrote:

    rfaramir:

    Both people are rewarded under both situations. The overall gain is no different. So, you're wrong, buy backs don't reward "those who no longer want to hold it".

    Additionally, any ownership in the company, creates similar conflict of interests every day. These are not new, nor exclusive to buy backs.

    From what you've said to Tim, we can see your preference is for dividends, which means you like cash flow and your income isn't taxed too much (in all likelyhood it is, but you prefer the cash flow more).

    The only difference between dividends and buy backs are the tax preferences. Overall the rational investor would choose dividends or a buy back based only on which incurs less tax.

  • Report this Comment On October 25, 2008, at 1:04 PM, tim322 wrote:

    $8 billion on top of an existing plan to buy back $9.3 billion in shares. $17.3 billion in share buy backs all going to offest dilution created by shares issued under Oracle's stock option and employee stock purchase plans? If so, either all oracle employees really like the stock or I desperately need to get a job with the company to get some of those stock options. I hope, because I own the stock, that the addition 8 billion is to repurchase shares opportunistically but just because they said the are going to doesn't mean they will..

Add your comment.

DocumentId: 760370, ~/Articles/ArticleHandler.aspx, 7/28/2014 4:42:53 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement