Novell Doubles Share Buybacks to $400 Million

Published: April 18, 2006

by Timothy Prickett Morgan

In a surprise move that was clearly aimed at further appeasing Wall Street, commercial Linux distributor Novell has doubled the size of its share buyback program to $400 million.

Wall Street likes share buybacks like this because the practice artificially boosts the earnings per share numbers as the public shares get more concentrated, giving the impression that the company is more profitable when all it did was spend cash to make itself look more profitable. IBM, perhaps the king of the share buyback, spent $34 billion on share buybacks between 1995 and 2000, and has continued doing so--albeit at a slightly less aggressive pace--since that time. For that same money, IBM could have done a million other things, like cut prices to increase market share, or promote its products, or create whole new products. When a company buys its own shares, what that really means is two things: they have run out of ideas or they do not know how to explain them to Wall Street in a way that Wall Street will believe. For instance, instead of buying its shares, maybe it should have spent the same dough on acquiring middleware maker JBoss instead of letting rival Red Hat beat it to the punch?

Novell is dipping into its cash hoard a little to buy back the shares, but it still has $845 million in cash as the first quarter of fiscal 2006 came to a close on January 31, and had another $841 million in short-term investments that could be turned back into cash relatively easily should the need to arise. This round of share buying ends in April 2007, and Novell is under no obligation to spend all of the dough it has allocated for the buybacks.