Wednesday, November 11, 2009

Investing in the business, versus investing in the stock(FCN)

Advisory firm FTI Consulting(FCN) announced on Monday they would commence an "accelerated" stock buyback program, to the tune of $250million.

"The Company will repurchase shares under the agreement as part of the $500 million share repurchase program announced on November 4, 2009.

"Under the agreement, FTI Consulting will pay $250 million to Goldman Sachs from available cash on hand to repurchase outstanding shares of its common stock and will receive a substantial majority of the shares to be delivered under the agreement by no later than November 12, 2009. The specific number of shares that ultimately will be repurchased under the agreement will be based generally on the volume-weighted average share price of the Company's common stock during the term of the agreement, subject to provisions that establish minimum and maximum numbers of shares. Goldman Sachs is expected to purchase shares of the Company's common stock in the open market in connection with the accelerated share buyback. The agreement contemplates that final settlement may occur in July 2010, although under certain circumstances, in Goldman Sachs' discretion, the completion date may be accelerated. At settlement, the Company may be entitled to receive additional shares of common stock from Goldman Sachs or under certain circumstances may be required to make a payment to Goldman Sachs. All of the repurchased shares will be retired."

Alarm bells - A stock buyback announcement need not be this lengthy. A buyback can be done quite simply, at 1.5cents per share. I called the company to get an idea about their thought process on buybacks, and what the upside beyond commission might be for Goldman.

AlphaNinja -->> "Will there be a potential opportunity for Goldman to reap some sort of profit beyond trading commissions?"

FCN Spokesman -->> "Well, that would depend on Goldman's principal transactions."

AlphaNinjna -->> "Did you consider a one-time dividend as a way to deploy this cash, as an alternative to a stock buyback?"

FCN Spokesman -->> "Well, in the absence of attractive acquisition opportunities, we chose to invest in the business we know best - ourselves."

AlphaNinja - "Ok, but to repeat myself, were there discussions about dividending (fake word?) this cash back to shareholders?"

FCN Spokesman -->> " Our shareholders preferred us to buyback stock. What would they do with the cash?"

....So a few things. Kudos to FCN for not chasing overpriced acquisition targets. I also like that they're purchasing shares closer to 52week lows rather than highs. Goldman may or may not have some sort of upside here, but I understand the reasoning to use them. $250million worth of stock is 5.4million shares. With 780k shares traded daily, it would take 71 trading days to complete this program, assuming FCN would want to account for only 10% of daily volume. Ok by me that they want to let Goldman handle it.

What is alarming is the above quote, "we chose to invest in the business we know best - ourselves" -->> that would be great, but that's NOT what they did. Investing in themselves would be increasing capital expenditures, using their knowledge to invest with a big return on that spending. What they're actually doing is simple stock market speculation, which does not improve the company's earnings prospects. If anything, they now have less liquidity.

Copyright 2009 AlphaNinja

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