Trouble in Closed Access paradise?

[greyhounds]

"greyhounds":

 The investment community wanted the money taken out of the railroad and put to better use. (As they saw it.) ...  They'd take money out of the railroad and give it to the investors ...

Just a few days ago, it was:

BNSF reduced its shares outstanding by 85,000,000 thereby increasing shareholder wealth (that's their job)

Oops, we went from increasing shareholder "value" to taking money out of the corporation, decreasing shareholder value.

Do you suppose Greyhounds is "more right" now, than he was then?

 

Sol really has trouble understanding things.  The buy back program took money out of the railroad and increased the wealth of the share holders by either:  1) paying them money if they sold or, 2) increasing the value of their shares if they didn't sell.

Sol, for some reason, can't begin to understand this simple concept. 

[MichaelSol]

As though shareholders couldn't sell on the NYSE, just as easily as to the buyback program, probably the same thing.

The price was the same -- market. Nobody got any richer.

And of course if they sold, they weren't shareholders anymore -- so how could their shareholder "value" increase, as you argued, because they held shares for which there were fewer outstanding? A real spin job here, greyhounds -- totally changing your whole story.

Actually, it hurt the remaining shareholders, as the price went down after the buyback ... reflecting of course the reduced equity in the corporation and the reduced capital investment, as well as the increased interest charges in subsequent years. So, shareholders -- those who remained invested -- were hurt.

Good job, greyhounds.

[TomDiehl]

TomDiehl: Anyone with actual accounting background will tell you that just isn't so.  

And your accounting background is ... what?

 

I never claimed to have one, which is more than we can say for Dave, who seems to disprove that claim with every statement.

[MP173]

A few more points in the stock price issue:

1.  BNSF and CN stocks both fell as a result of the proposed merger of the two systems.

2.  Leaders Count the excellent book on the BNSF discusses briefly the capex programs in the mid to late 90's.  There was purchasing of locomotives to "catch up" with inadequate power.  Second there was the normal capex expenditures and finally there was "expansion" capital for growth.  This expansion was dubbed "Build it and they will come" named after the movie "Field of Dreams."  During the UP - SP meltdown the traffic did show up, but after UP got back on track the traffic went away.

Reductions in the "expansion" capital were made in order to target capex to revenue.  No doubt the stock buyback was made to placcate Wall Street. 

I think to say the stock repurchase plan was solely the reason for the stock decline is not accurate.  There were many issues at work at the time.  The biggest, in my opinion was that during the go-go growth era of the late 90's/early2000's, Wall Street couldnt and wouldnt get excited about a company with slow growth.

Remember...it was all about growth and dot coms. 

ed

[MichaelSol]

I think to say the stock repurchase plan was solely the reason for the stock decline is not accurate.  There were many issues at work at the time. 

No one said that it was.

What I said was that the decline in stock price was consistent with the accounting effect of the stock purchase plan because 1) of the size of the transaction, 2) the fact that it relied on borrowed funds, 3) the fact that it placed the Company's debt to equity ratio at what is considered a "dangerous" level by financial analysts, 4) that it came at the sacrifice of capital investment, 5) that it resulted in increased interest charges/lower profits significantly in following years, and 6) caused higher interest charges for subsequent necessary debt, it was natural, a completely natural, result for shareholder value to decline notwithstanding that there were fewer shares.

The effect is not a guess, and even if greyhounds doesn't get it, it is plainly spelled out on the Balance Sheet prepared by the BNSF itself.

If there were reasons that an investor might pay less for such a stock after such a stock repurchase plan, in the absence of compensating good news elsewhere, those were good ones.

Were they the only things that affected stock price? Ever?

Of course not. Nothing occurs in a vacuum, but the fact that debt, interest charges, reduced capital spending all have long term effects compared to other day-to-day events on a railroad, the effects of the stock repurchase program were substantial, negative, and long term.

A reasonable investor would ignore them at his or her peril.

[MichaelSol]

A few more points in the stock price issue:

1.  BNSF and CN stocks both fell as a result of the proposed merger of the two systems.

BNSF operating income generally declined 1998-2002.  Wouldn't that have affected the stock value more than the merger talk?

The Company retired 86 million shares during that time, but notwithstanding substantially fewer outstanding shares, earnings per share declined from $2.45 to $2.01. So much for shareholder value.

Net income prior to the stock repurchase program was $1.137 billion, but fell to $760 million by 2002. And the decline was relatively steady, not attributable to a single event or occurence.

Interest charges went from $354 million in 1998 to $463 million in 2001. When a company is borrowing money to pay dividends and to buy-back shares, the net effect is cumulative and corrosive, and this shows clearly at BNSF during this period.

[Murphy Siding]

I think to say the stock repurchase plan was solely the reason for the stock decline is not accurate.  There were many issues at work at the time. 

No one said that it was.

    Well, no.  No other than you said it was.

[MichaelSol]

I think to say the stock repurchase plan was solely the reason for the stock decline is not accurate.  There were many issues at work at the time. 

No one said that it was.

    Well, no.  No other than you said it was.

What on earth is this all about?

On 7-28, I specifically stated "... the fact that GAAP, as represented on the Balance Sheet, accurately shows the decline in shareholder wealth does not preclude other influences on stock prices, not at all."

In a different post, I also stated that in addition to the negative impact of the stock repurchase program: "... income [also] declined during the three year period."

Your statement misrepresents my comments.

[Anonymous]

TomDiehl: Anyone with actual accounting background will tell you that just isn't so.  

And your accounting background is ... what?

I never claimed to have one, which is more than we can say for Dave, who seems to disprove that claim with every statement.

Actually, I do have an accounting background.

[Murphy Siding]

I think to say the stock repurchase plan was solely the reason for the stock decline is not accurate.  There were many issues at work at the time. 

No one said that it was.

    Well, no.  No other than you said it was.

What on earth is this all about?

On 7-28, I specifically stated "... the fact that GAAP, as represented on the Balance Sheet, accurately shows the decline in shareholder wealth does not preclude other influences on stock prices, not at all."

In a different post, I also stated that in addition to the negative impact of the stock repurchase program: "... income [also] declined during the three year period."

Your statement misrepresents my comments.

     Whatever.  We've already gone around in this circle once, so what's the difference?

You gentlemen as asking one of those non-sequitur questions. Something like, just because the stock result was what GAAP predicted, doesn't this really mean "something else" caused the result?

Well, what?

     Fair enough, let me try to focus the question a little bit.  Are you saying that the stock price went down, solely because of the buy-back?

 

Above is from the other day.

     If you can't even explain what you're trying to say, don't hold it against others who don't understand it either.

[TomDiehl]

TomDiehl: Anyone with actual accounting background will tell you that just isn't so.  

And your accounting background is ... what?

I never claimed to have one, which is more than we can say for Dave, who seems to disprove that claim with every statement.

Actually, I do have an accounting background.

And he even quoted my entire statement.

[greyhounds]

As though shareholders couldn't sell on the NYSE, just as easily as to the buyback program, probably the same thing.

Your continued failure to understand the most basic economic concepts is amazing.  The buyback program increased

The price was the same -- market. Nobody got any richer.

And of course if they sold, they weren't shareholders anymore -- so how could their shareholder "value" increase, as you argued, because they held shares for which there were fewer outstanding? A real spin job here, greyhounds -- totally changing your whole story.

Your continued failure to understand the most basic economic concepts is amazing.  The buyback program increased the sale price of the stock relative to what it would have otherwise been.

It increased the demand for outstanding shares.  That would take the price higher than it would have otherwise been.  You know, increase demand = price is higher than it would have otherwise been.

But you falsely say "The price was the same".  You're wrong again. 

The shareholders who sold had their wealth increased by the buyback plan.  You simply and continually fail to understand the whole supply/demand thing.

Actually, it hurt the remaining shareholders, as the price went down after the buyback ... reflecting of course the reduced equity in the corporation and the reduced capital investment, as well as the increased interest charges in subsequent years. So, shareholders -- those who remained invested -- were hurt.

Good job, greyhounds.

You could only be right if the value of the BNSF on the market was its "book value".  And you have zero evidence that the railroad was being valued at "book" by the stock market.  The people who did not sell were willing to take the risk that the future earnings would pay them for their risk.  They were valuing their holding based on future earnings, not "book value". Based on the BNSF's stock performance they were right and their wealth increased.

So the BNSF buyback plan did the investors well.   It increased the sale price for those who chose to take their money elsewhere and it positioned the railroad so that it could take advantage of the earnings from the current traffic boom.  The latter rewarded those who chose not to sell their shares. 

It also allowed the railroad to keep itself fluid and avoid UP style service disruptions.

You'd do everyone on this forum a big favor if you'd take a junior college econ class.  I'd suggest an introductory class.

 

[MP173]

BNSF shares dropped 7% on the day of the announcement of the CN merger.

ed

[MichaelSol]

I think to say the stock repurchase plan was solely the reason for the stock decline is not accurate.  There were many issues at work at the time. 

No one said that it was.

    Well, no.  No other than you said it was.

What on earth is this all about?

On 7-28, I specifically stated "... the fact that GAAP, as represented on the Balance Sheet, accurately shows the decline in shareholder wealth does not preclude other influences on stock prices, not at all."

In a different post, I also stated that in addition to the negative impact of the stock repurchase program: "... income [also] declined during the three year period."

Your statement misrepresents my comments.

     Whatever.  We've already gone around in this circle once, so what's the difference?

You gentlemen as asking one of those non-sequitur questions. Something like, just because the stock result was what GAAP predicted, doesn't this really mean "something else" caused the result?

Well, what?

     Fair enough, let me try to focus the question a little bit.  Are you saying that the stock price went down, solely because of the buy-back?

 

Above is from the other day.

     If you can't even explain what you're trying to say, don't hold it against others who don't understand it either.

And my answer, "the other day" was:

Same thing happened in 2002. Growth, including additional paid in capital, exceeded the liability incurred from the buyback program. Shareholder wealth increased again. In 2003, once again a variety of positive factors including retained earnings exceeded the liabilities incurred from the stock repurchase programs. Shareholder wealth again increased. Happened again in 2004 and 2005.

Stock prices went down after the largest stock repurchase, and have gone up as the Balance Sheets show other, positive factors offsetting the negative impact of the stock repurchases.

This to me shows the usefulness of GAAP. It also shows that stock repurchases, by themselves, are negative. That is, stock values have mirrored the shareholder wealth shown on the Balance Sheets and when stock repurchases overwhelm the effects of growth or other positive developments, stock prices go down because shareholder wealth objectively declines.

Pretty clear to me.

What's got into you?

[n012944]

BNSF shares dropped 7% on the day of the announcement of the CN merger.

ed

 

That sounds to me like the "somthing else" that most of us thought had happend.

 

Bert

[MichaelSol]

BNSF shares dropped 7% on the day of the announcement of the CN merger.

ed

 

<>That sounds to me like the "somthing else" that most of us thought had happend.  <>
Bert

"most of us ..."

If you purchased $100,000 of BNSF stock in May, 2006, you would now have about $74,000 -- an enormous loss, 26%, of shareholder value, notwithstanding record earnings. Much worse than the "CN merger" blip. OK expert, what happened?

[n012944]

BNSF shares dropped 7% on the day of the announcement of the CN merger.

ed

 

<>That sounds to me like the "somthing else" that most of us thought had happend.  <>
Bert

"most of us ..."

If you purchased $100,000 of BNSF stock in May, 2006, you would now have about $74,000 -- an enormous loss, 26%, of shareholder value, notwithstanding record earnings. Much worse than the "CN merger" blip. OK expert, what happened?

I never said I was an expert.  However most of the people on this thread said there was something else that happend to make the stock price fall in 2000 besides the buyback.  MP173 posted somthing that seems to be the "something else" that people had thought happend.  So what does the stock price now have to do with that?   

 

Bert 

[Murphy Siding]

    Michael, Briefly: You have spent most of 4 pages trying to convince all of us that the only reason BNSF's stock went down, was because of the buy-backs. If you look back, you'll see that I, and several others have asked for clarification, and feel that none was given.  While I feel I'm trying to understand what it is you're trying to say, it appears (to me,at least) that you get the enjoyment just out of spinning circles.  So be itIt's a message board, and you and I are both free to say what we wish.

      To that end, I'll work on not entering into some of the discussions that seem to lead to no where. I do thank you for your contributions in the past about The Milwaulkee Road.

[MichaelSol]

"That sounds to me like the "somthing else" that most of us thought had happend.  <>
Bert"

BNSF's investment advisers argued differently.

"Representatives of investment firms that are advising the applicants in the BNSF/CN
proceeding  ... pointed out that there is no way to know definitively what is driving rail stock prices downward, and that the drop in rail stock prices could simply be related to many of the same factors that are depressing the stocks of companies in other old economy industries." SURFACE TRANSPORTATION BOARD, DECISION, STB Ex Parte No. 582, PUBLIC VIEWS ON MAJOR RAIL CONSOLIDATIONS, Decided: March 16, 20  fn 8.

Analysts looked at the merger this way:

"Stock exchange disapproval was quick in coming. By week's end BNSF had dropped from a Monday high of $27 13/16 all the way to $23 15/16, a loss of 14%, the sort of change you'd expect of something like trendy Linux software-maker Corel, not a big NYSE-traded railroad. CN was hit upside the head just as hard, falling from a week's high of $31 9/16 down 16% to $26 5/8, having recovered slightly from Thursday's intraday low of $25 ½. As Larry Kaufman put it in the JOC, "Wall Street trashed BNSF's stock. A Senator said Congress would have to take a close look at the transaction, while a key regulator [Linda Morgan] expressed surprise." Blanchard Report December 25, 1999.

Do you suppose the huge stock repurchase program in 2000 was to try and recover from the reaction that Wall Street had to the merger proposal, rather than the convoluted explanation set forth by Strawbridge earlier?

Nobody liked the CN-BNSF merger proposal. But, on March 20, 2000, the STB put a hold on everything, and that was that.

The stock repurchase plan came on the heels of the merger stock debacle. The stock debacle itself, however had nothing to do with what actually happened to the company, financially, as a direct result of the stock purchase plan.

The merger accouncement had nothing to do with the debt to equity ratio deteriorating from 41.6% to 47.8% over the year 2000. " The increase in 2000 over the prior year is attributable to the increase in debt and lower equity due primarily to higher share repurchases ...". p. 25 2000 BNSF Ann. Report. .Had nothing to do with borrowing $1 billion   . and the fact that interest was higher ..."higher interest expense in 1999 incurred on borrowings to fund the share repurchase program."? p. 23 2000 BNSF Ann Report.

"Net cash used for financing activities during 2000 was $648 million, principally consisting of share repurchases of $1,496 million and dividend payments of $206 million, partially offset by net debt borrowings of $1,034 million." p. 24.

"Interest expense for 2000 of $453 million increased $66 million, or 17 percent, principally reflecting higher debt levels resulting from the Company’s share repurchase program and higher interest rates. Total debt increased to $6,846 million at December 31, 2000, from $5,813 million at December 31, 1999."

  BNSF incurred this continuing expense at a time when it's market share was declining. During 1999, "BNSF’s share of the western United States rail traffic market, based on reporting to the AAR, decreased 0.8 points to 43.5 percent." p. 23. What did that have to do with the CN merger?

And in 1999, "Interest expense for 1999 of $387 million increased $33 million, or 9 percent, principally reflecting higher debt levels resulting from the Company’s share repurchase program. Total debt increased to $5,813 million at December 31, 1999, from $5,456 million at December 31, 1998."

In the two year period, interest charges increased just about $100 million, 28% over 1998, due to stock repurchases. Debt soared from $5,456 million to $6,846 million.

Debt incurred to repurchase shares bore interest at approximately 8%.

If borrowed on ten year notes, the total cost of the stock buyback for those two years was  $2.2 billion, plus $990 million interest, a total charge against current and future earnings and equity was incurrred of $3.2 billion.

During those two years, BNSF paid an average of $25.16 to repurchase shares. Shareholders would have received substantially more if it had not been for the BNSF/CN merger announcement -- but apparently that was a "shareholder value" enhancement strategy. Indeed, the stock buyback of 65 million shares came at $23.16, the two year low. And it didn't boost share price for the remaining shares. Real shareholder value! [sarcasm].

But, that didn't do the Company itself any good. The total cost to the Company [i.e. other shareholders] per share was $36.54 per share when the interest charges on the debt incurred was included.

The CN merger fiasco, coupled with the stock buyback, managed to hurt both the shareholders and the Company.

[MichaelSol]

    Michael, Briefly: You have spent most of 4 pages trying to convince all of us that the only reason BNSF's stock went down, was because of the buy-backs. If you look back, you'll see that I, and several others have asked for clarification, and feel that none was given.  While I feel I'm trying to understand what it is you're trying to say, it appears (to me,at least) that you get the enjoyment just out of spinning circles.  So be itIt's a message board, and you and I are both free to say what we wish.

      To that end, I'll work on not entering into some of the discussions that seem to lead to no where. I do thank you for your contributions in the past about The Milwaulkee Road.

One of my early remarks was as follows:

If nothing else, that suggests there's a connection between stock buy-back and lack of infrastructure investment and that while stock buyback may be a great deal for management, it may not be a benefit to the Company and may in fact damage its long term prospects by increasing debt load.

I have simply never said that the "only reason the stock went down is because of the buybacks".

 I did however say that, in this instance, the "buybacks had a negative impact on the stock."

These two statements are not the same, by a long shot.

And, on page 2, I outlined the reasons why:

1) debt increased substantially
2) the debt to equity ratio deteriorated significantly
3) shareholder wealth declined
4) the market value of the company declined
5) cash flow was further impaired by additional interest charges in following years

There is a world of difference between you alleging I said one thing, and what I actually said.

And since I have spent three pages stating there are many reasons why stock might go up or down, any contention at this point is just flogging a point that, if misunderstood originally, should not be misunderstood after my comment that "many things affect stock price" three pages ago. After that, it is simply an intentional distortion.

[MichaelSol]

Murphy Siding wrote today:
Michael, Briefly: You have spent most of 4 pages trying to convince all of us that the only reason BNSF's stock went down, was because of the buy-backs. If you look back, you'll see that I, and several others have asked for clarification, and feel that none was given.

On July 28, Murphy Siding Wrote:

     I guess what I was asking, was the buy-back the sole cause & effect of the stock price being lower?  That is how it appears to be presented here.  If  that is what Michael is implying, that seems like something of a stretch.

To which I responded on the same day:

On the other hand, my comment was "the fact that GAAP, as represented on the Balance Sheet, accurately shows the decline in shareholder wealth does not preclude other influences on stock prices, not at all."

I do not know how I could have been any clearer. If you honestly believe that there was no clarification, I think the responsibility for the misreading is clearly on the reader, because it is a clear misreading of my specific response to your specific request for a clarification.

There is no reason to continue to "misunderstand" the clarification for three pages. That's simply intentional.

It is notable, however that the CN/BNSF merger discussion was announced during December, 1999, when the stock dropped for some reason -- BNSF financial advisers differ from people on this thread as to the reasons for the stock drop.

The share repurchase event under discussion occured in 2000 and was fully disclosed on a Balance Sheet and Annual Report published in March, 2001 which is when an investor would have had a full disclosure of the impacts. The CN/BNSF merger was long dead by then.

It is true the stock dropped when the BNSF/CN merger was announced in 1999. But, we were not, in fact, discussing an event -- the stock repurchase -- that occured during 1999, but an event that occured during the year 2000, with a full accounting nearly 15 months after the drop in stock due to the merger announcement.

Do you think that the reason that BNSF stock price declined from $31 a share in 1999 to $27 a share in April, 2001 was really because of the CN/BNSF merger announcement in December, 1999? How long do you think that effect lasted? Are you saying higher interest charges and lower earnings had nothing to do with it?

That taking $1.5 billion in equity out of a corporation in Year 2000 did not affect share price?

What does?

Surely not a long dead merger proposal.

Of course, BNSF began to seriously underperform both the Dow and the S&P in 1996 -- the first year of the stock repurchase program, but also the year of the SF merger. But, the merger benefits didn't seem to accrue -- the stock price underperformed for the eight year period, 1996-2004. But, we can say that the low price had nothing to do with CN/BNSF merger announcement, because that announcment  hadn't happened until three years into that condition.

[MP173]

I assume you are referring to me as the "expert" since I made mention of the 7% drop.

I have no clue, other than the obvious answer that the transports have been moving lower all summer and if one is a believer in the Dow Theory of the Industrials not being able to maintain price support UNLESS fully supported by the Transports...then we are in for a correction.

But then again, I am not a technical guy.  I dont chart, I buy on fundamentals and valuations based on discounted future cash flows. 

It kinda goes back to my original statement of there being more sellers than buyers. 

BTW, if one had purchased $100,000 at the highest closing price in May of $83.99, one would currently have (based on current price of $67.23) in excess of $80,000, considerably higher than $74,000.  Still a considerable "short term" loss, if one is a trader.  But, then again, if one were a trader, one would have been long gone.

Everyone makes their own decisions regarding when to buy and when to sell individual equities.  To have purchased high and sold low is unfortunately what some of us do from time to time.

ed

[MichaelSol]

Another way of looking at it, from an investor's perspective.

How would an investor view the impact of the stock buyback program?

The company incurred debt of $2.2 billion, charges to debt and against retained earnings/equity for the years ending 1999 and 2000, and interest charges into the future (assuming ten years) of $990 million.

The total cost of the Stock Repurchase program in those two years, to the Company "value," of  $3.179 billion.

The Company suffered a loss in market capitalization between the $31/share the market allocated in 1999 (when 470.5 million shares were outstanding), and the $27 per share that the market allocated in April, 2001 (when 412 million shares were outstanding).

The total decline in market capitalization of $3.260 billion.

I am absolutely positive that, somewhere, Greyhounds took the economics class that he says will teach everyone that a $3.3 billion loss in value, a 23% decrease, represents enhanced shareholder value.

However, rounding off, what is clear is that the "market" depreciated the value of the BNSF by approximately $3.3 billion during the period of time that an investor could see that the cost to the company of the stock re-purchase program would ultimately total $3.2 billion for that same two year period.

Those do indeed go to the fundamentals of the company, more so than an aborted merger announcement.

I simply find it hard to believe that an investor would not look at it as a reasonable investor would look at it.

Greyhounds' error in his usual commentary was to assume book value. Nobody said anything about book value. Share price does not measure book, it measures market. The book value declined, but the market value declined even more -- because investors measure future "impact."

Income also declined during that period -- in part of course due to higher interest charges, but only in part.

Is there a rational basis for a shareholder to offer $27 per share in April, 2001, rather than the $31 she offered in 1999?  Murphy, do you consider it merely a coincidence that market cap declined by nearly the identical amount that a rational investor would assess the impact on the company of the share repurchase program, using nothing more mystical than generally accepted accounting principles?

Not sure, by April of 2001, how an investor would value the impact of the CN/BNSF merger announcement of December, 1999 on her reason for offering $27 per share, nothwithstanding that there were 87 million fewer shares outstanding, which according to Greyhounds meant she should have been offering, or offered, something substantially higher than $31 per share. Reality, however, by offering no support for his contentions, plays no role in his assumptions or conclusions.

I can read exactly why I would buy at $27 in April, 2001 from the Balance Sheet.

I just can't find the CN/BNSF merger on that Balance Sheet prepared December 31, 2000.

I do see that my shares of BNSF were worth a lot less than they were in 1999.

The junior college course that tells me I should have been happy, that my shareholder value actually increased, wasn't in any of my course catalogs. Of course, I am less familiar with junior colleges than Greyhounds. But, I didn't major in abnormal psychology either.

[MichaelSol]

I assume you are referring to me as the "expert" since I made mention of the 7% drop.

No, it relates to the "other guy" after reading a series of confident factual prouncements on other threads, in support of very strong opinions, on which he almost invariably was exactly, factually, wrong.

On the stock drop, as I posted, it was worse than 7%.

[n012944]

I assume you are referring to me as the "expert" since I made mention of the 7% drop.

No, it relates to the "other guy" after reading a series of factual prouncements on other threads, on which he almost invariably was exactly, factually, wrong. On the stock drop, as I posted, it was worse than 7%.

 

That would be me, that is Michael's little dig at me because I disagree with him a lot.  Note, I have never claimed to be an expert on anything, and if the only people that posted on this board were experts on the subject of the posts, the board would be VERY slow.

 

Bert

[Anonymous]

Another way of looking at it, from an investor's perspective.

How would an investor view the impact of the stock buyback program?

The company incurred debt of $2.2 billion, charges to debt and against retained earnings/equity for the years ending 1999 and 2000, and interest charges into the future (assuming ten years) of $990 million.

The total cost of the Stock Repurchase program in those two years, to the Company "value," of  $3.179 billion.

The Company suffered a loss in market capitalization between the $31/share the market allocated in 1999 (when 470.5 million shares were outstanding), and the $27 per share that the market allocated in April, 2001 (when 412 million shares were outstanding).

The total decline in market capitalization of $3.260 billion.

I am absolutely positive that, somewhere, Greyhounds took the economics class that he says will teach everyone that a $3.3 billion loss in value, a 23% decrease, represents enhanced shareholder value.

However, rounding off, what is clear is that the "market" depreciated the value of the BNSF by approximately $3.3 billion during the period of time that an investor could see that the cost to the company of the stock re-purchase program would ultimately total $3.2 billion for that same two year period.

Those do indeed go to the fundamentals of the company, more so than an aborted merger announcement.

I simply find it hard to believe that an investor would not look at it as a reasonable investor would look at it.

Greyhounds' error in his usual commentary was to assume book value. Nobody said anything about book value. Share price does not measure book, it measures market. The book value declined, but the market value declined even more -- because investors measure future "impact."

Income also declined during that period -- in part of course due to higher interest charges, but only in part.

Is there a rational basis for a shareholder to offer $27 per share in April, 2001, rather than the $31 she offered in 1999?  Murphy, do you consider it merely a coincidence that market cap declined by nearly the identical amount that a rational investor would assess the impact on the company of the share repurchase program, using nothing more mystical than generally accepted accounting principles?

Not sure, by April of 2001, how an investor would value the impact of the CN/BNSF merger announcement of December, 1999 on her reason for offering $27 per share, nothwithstanding that there were 87 million fewer shares outstanding, which according to Greyhounds meant she should have been offering, or offered, something substantially higher than $31 per share. Reality, however, by offering no support for his contentions, plays no role in his assumptions or conclusions.

I can read exactly why I would buy at $27 in April, 2001 from the Balance Sheet.

I just can't find the CN/BNSF merger on that Balance Sheet prepared December 31, 2000.

I do see that my shares of BNSF were worth a lot less than they were in 1999.

Okay, so BNSF went into debt to repurchase stock rather than using cash on hand to facilitate the repurchase.  Stock repurchases are usually enacted to enhance shareholder value, so obviously this bizzaar transaction did not result in the ostensibly desired result, aka it backfired.  However, it did give Exhibit A for why a company should only use debt financing for capital projects aka asset development, not for stock price manipulation.

Are there any other examples of a company, any company, financing stock repurchase with new debt?

Would such a transaction have occurred under a separation scenario?  Would it have occurred if BNSF was one of 30 or 40 integrated Class I's rather than one of seven?

[MichaelSol]

  Stock repurchases are usually enacted to enhance shareholder value, so obviously this bizzaar transaction did not result in the ostensibly desired result, aka it backfired. 

Well, this is certainly the "cover" story for the typical stock repurchase program.

However, as the Balance Sheet plainly shows, stock repurchased becomes Treasury stock, and is carried as a debit. The accounting reasoning is clear.

Sale of stock raises capital. Repurchasing the stock takes capital out of the corporation. This is why Treasury Shares are shown as negative accounting entries, even if purchased with free cash flow. Capital intensive businesses don't benefit from reductions in capital.

Stock repurchases do not enhance shareholder value, and it clearly shows why on the Balance Sheet. It doesn't hurt it [unless the funds are borrowed], but strictly as an accounting measure, it can neither hurt nor help shareholder value since the number of shares repurchased reduces the capital of the corporation by an equivalent sum.

On the other hand, as stocks are peeled out of the authorized shares and issued for stock options to executives, without a stock repurchase program shareholder value would, in fact, decline -- all else being the same -- as stocks issued continued to dilute existing holdings.

That is the significance of the fact that BNSF shares issued have continued to rise, and why this is substantially different, at this point in time, than shares outstanding.

If the shares issued all remained outstanding, regular investors would sit up and take notice of that, as their shares would have undergone a substantial dilution as the result of executive stock options being exercised. Stock repurchase programs are a management tool to disguise or mitigate the impact of large numbers of newly minted shares issued to executives as options.

The advantage to the investor shareholder of a stock repurchase is that the remaining outstanding shares will benefit to a larger extent on a per share basis if retained earnings substantially enhances the future value of the corporation, but the downside is that if that value declines, the remaining shares also risk a greater loss per share.

That is, the volatility -- risk -- of the stock in terms of the individual share value to the shareholder is increased by a stock repurchase program.

However, as a stand-alone measure, a stock repurchase program does not enhance nor destroy shareholder value. Only the future can do that.

The future ... or a stock repurchase program that not only removes capital from the corporation, but incurs debt and interest charges to do so.

[TomDiehl]

  Stock repurchases are usually enacted to enhance shareholder value, so obviously this bizzaar transaction did not result in the ostensibly desired result, aka it backfired. 

Well, this is certainly the "cover" story for the typical stock repurchase program.

However, as the Balance Sheet plainly shows, stock repurchased becomes Treasury stock, and is carried as a debit. The accounting reasoning is clear.

Sale of stock raises capital. Repurchasing the stock takes capital out of the corporation. This is why Treasury Shares are shown as negative accounting entries, even if purchased with free cash flow. Capital intensive businesses don't benefit from reductions in capital.

Stock repurchases do not enhance shareholder value, and it clearly shows why on the Balance Sheet. It doesn't hurt it [unless the funds are borrowed], but strictly as an accounting measure, it can neither hurt nor help shareholder value since the number of shares repurchased reduces the capital of the corporation by an equivalent sum.

On the other hand, as stocks are peeled out of the authorized shares and issued for stock options to executives, without a stock repurchase program shareholder value would, in fact, decline -- all else being the same -- as stocks issued continued to dilute existing holdings.

That is the significance of the fact that BNSF shares issued have continued to rise, and why this is substantially different, at this point in time, than shares outstanding.

If the shares issued all remained outstanding, regular investors would sit up and take notice of that, as their shares would have undergone a substantial dilution as the result of executive stock options being exercised. Stock repurchase programs are a management tool to disguise or mitigate the impact of large numbers of newly minted shares issued to executives as options.

The advantage to the investor shareholder of a stock repurchase is that the remaining outstanding shares will benefit to a larger extent on a per share basis if retained earnings substantially enhances the future value of the corporation, but the downside is that if that value declines, the remaining shares also risk a greater loss per share.

That is, the volatility -- risk -- of the stock in terms of the individual share value to the shareholder is increased by a stock repurchase program.

However, as a stand-alone measure, a stock repurchase program does not enhance nor destroy shareholder value. Only the future can do that.

The future ... or a stock repurchase program that not only removes capital from the corporation, but incurs debt and interest charges to do so.

Sounds like we have some "trouble in a different kind of paradise" here. Now we have the Montana Lawyer debating with the bookkeeper from the Pacific Northwest (although I'm not sure how "Idaho" qualifies as PNW, maybe Washington and Oregon don't exist in his world).

[greyhounds]

The future ... or a stock repurchase program that not only removes capital from the corporation, but incurs debt and interest charges to do so.

What Sol doesn't understand is that the whole idea was to remove capital from the corporation.  The capital was being used up by the railroad.  It was being destroyed, and investors naturally wanted to save it.

There's nothing wrong with this.  Capital is a scarce resource and it shouldn't be wasted. 

In the view of the money folks Krebs was wasting money by buiilding new track.  They reasoned that the money spent doing so would be lost.  They had good reason to believe this.  Railroads didn't earn their cost of capital.

Sol doesn't understand the purpose of a railroad corporation.  He thinks that purpose is to move freight.  He is wrong.  (again.)  The purpose is to increase the wealth of the shareholders.  Now, some of you may object to this, but over 100's of years this has been proven time and again as the best way to organize an economy for the greatest common good.  Allowing capital to move to where it gets the greatest return optimizes its use.  And no laws or regulations can do a better job.

So Sol is critical of a process that did exactly what it was supposed to do.  His criticism proves his ignorance.  He can come up with numbers - but he has no understanding of those numbers.

BNSF senior management has done a great job.  Krebs and Rose were able to finance the expansions needed to move the coal, grain, intermodal, etc. while keeping their essential investors on board.  They were managing a corporation that traditionally had not earned its cost of investment.  So doing what they did deserves admiration.

 

 

[MichaelSol]

The future ... or a stock repurchase program that not only removes capital from the corporation, but incurs debt and interest charges to do so.

What Sol doesn't understand is that the whole idea was to remove capital from the corporation.  The capital was being used up by the railroad.  It was being destroyed,....BNSF senior management has done a great job... deserves admiration.

The "whole idea" in his initial post was to "enhance shareholder value."

During this thread Greyhounds has gone from "enhancing shareholder value", to Krebs and senior management destroying capital -- i.e. the corporation itself. And that was good too, he says.

Needless to say, the statistical proof that the stock repurchase of 2000 itself destroyed value and destroyed capital, begs the question that Greyhounds raises: that BNSF was "destroying" capital under Rob Krebs' management, and so needed to destroy or remove some more by a stock repurchase.

But that was all allegedly increasing shareholder value at the same time, even as the story is, now, that BNSF was destroying capital.

Hard to keep up with the changing stories.

Interesting new theory of management prowess as well.

Note, however, the usual sleight of hand.

From a discussion of the specific financial effects of a shareholder repurchase in two given years, Greyhounds tries to change the subject to a ringing endorsement of overall management over a ten year period, as though one intrinsically validates the other, and as though a decision of China to keep the Yuan severely undervalued makes Matt Rose a genius.

Not the same thing.

And doesn't even try to offer an economic justification even though this is a conversation that can only be discussed by such a reference because "shareholder value" is defined by discrete economic units: dollars.

But, like trying to intentionally confuse a discussion on intermodal market share at Port of Seattle with the entire PNW, the tactic is the same: bait and switch.

Now, management of the BNSF by Krebs and Rose is quite a different topic, as it surely includes many assessments, financial, strategic and otherwise.

But, simply to argue that if they did something, it must have been good, is a bit too simplistic for my taste. The stock repurchase 1999-2000 had to stand on its own merits: it increased annual expenses, it removed capital, it reduced capital investment at a key time, and it objectively reduced shareholder value.

Objectively, it made the Company less profitable. Objectively, by running the debt to equity ratio to nearly 50% it jeopardized the ability of the Company to finance further investment at former, more favorable rates.

Just because Matt Rose and Rob Krebs were in management at the time has no bearing on the actual effects of the stock repurchase. The financial effect as it actually happened is a matter of record, and that can't be changed by reference to a name of a person in management as though that bestows some magical result that is contrary to the documented record.