Companies have been adopting recently a strategic restructuring exercise by reducing cash in buying back shares to increase performance.
Reuters, the international news and information group, the largest company in the media sector, has primarily expanded through organic growth. The company, with market capitalisation in excess of £10 billion, lay emphasis in understanding and applying technology, by investing £500 million a year on capital expenditure and research and development, rather than making major acquisition. In 1997, it received over £1 billion cash and has a low level of gearing.
The board believed that it should maintain its present focused approach and return cash excess to its requirements to the shareholders, in order to increase shareholder value and reduce of capital. Instead, in 1998 shareholders would receive, 13 shares in Reuters Groups plus £13.60 in cash for every 15 shares held, in the form of a one-off giant dividend. On the stock market its shares prices moved up 4.5 per cent in value.
This strategy was not successful for Halifax in March 1998, which intended to buy back £1 billion of its shares. Though there was an announcement of a 15 per cent profit, its share price fell by 25p. But one week later, it recovers its loss from an aggressive acquisition and got a £780 million bid.
Thus the size isn’t everything, by buying back shares or making major acquisition can both be a successful strategy or not, but it depends on the situation.
Reuters, the international news and information group, the largest company in the media sector, has primarily expanded through organic growth. The company, with market capitalisation in excess of £10 billion, lay emphasis in understanding and applying technology, by investing £500 million a year on capital expenditure and research and development, rather than making major acquisition. In 1997, it received over £1 billion cash and has a low level of gearing.
The board believed that it should maintain its present focused approach and return cash excess to its requirements to the shareholders, in order to increase shareholder value and reduce of capital. Instead, in 1998 shareholders would receive, 13 shares in Reuters Groups plus £13.60 in cash for every 15 shares held, in the form of a one-off giant dividend. On the stock market its shares prices moved up 4.5 per cent in value.
This strategy was not successful for Halifax in March 1998, which intended to buy back £1 billion of its shares. Though there was an announcement of a 15 per cent profit, its share price fell by 25p. But one week later, it recovers its loss from an aggressive acquisition and got a £780 million bid.
Thus the size isn’t everything, by buying back shares or making major acquisition can both be a successful strategy or not, but it depends on the situation.