Sun's Board Authorizes $3 Billion in Share Buybacks

Published: May 17, 2007

by Timothy Prickett Morgan

The board of directors of Sun Microsystems did something this week that many Wall Street analysts have been pressing the company to do since it appeared that Sun was back on track to a recovery: authorize buybacks of company shares from the market. And, because Wall Street is a capricious task master, investors pretty much yawned on the news that the Sun board had authorized the firm to spend up to $3 billion in hard-earned cash on buybacks.

"The board's approval of the share repurchase program reflects its confidence in the continued growth of Sun's business and an ongoing commitment to increase shareholder value," said Mike Lehman, Sun's chief financial officer. "With over $5.4 billion in cash and marketable debt securities, we have maintained a strong balance sheet and feel confident that this program will allow us to further pursue strategic opportunities for growth."

Sun will not, of course, just go out into the market and spend $3 billion on shares. Companies of all sizes and industry sectors give shares to employees as a means of rewarding performance, and such share buybacks are justified because offering shares to employees dilutes the shares for other holders of the public company's stock. Buying the stock back is a means to reduce or eliminate this dilution. Companies could, of course, just give cash to their employees. But cash doesn't grow, and having a piece of stock that can appreciate to hold on to is a means of motivating people. Stock is also a cheaper way of giving compensation, especially if a company is on the rebound.

However, companies have other reasons for doing share buybacks. By taking shares off the market companies can boost their earnings per share, compared to a year-ago quarter. And in a lot of cases--particularly in tough markets like the IT space where big growth is sometimes tough to come by--being able to have net earnings per share grow faster than revenue through cost cutting, divestitures of weak business units, and share buybacks is the name of the game. IBM is the poster child for this strategy, having spent an estimated $75 billion to buy back over 1.2 billion shares from the beginning of 1995 through the end of 2006 to make earnings per share outgrow actual earnings. Amazingly, IBM ended 2006 with 1.6 billion shares still outstanding.

Sun says that it will buy shares on the open market as it feels it needs to and will also involve private transactions, including structured transactions. The company also said that the stock repurchase program does not have an expiration date and can be modified at any time.

A stock repurchasing plan that Sun had on the books from February 2001 has been killed off. That plan authorized Sun's managers to buy back $1.5 billion worth of shares. At that time, Sun had 3.26 billion shares outstanding, a market capitalization that peaked in late 2000 at over $220 billion, $7.4 billion in cash, and posted $17.6 billion in sales in fiscal 2000. Sun was also just beginning to enter a steep downslide after being a darling on Wall Street through the whole dot-com boom of the late 1990s. Today, Sun has 3.57 billion shares outstanding and a market capitalization of $18.6 billion; its sales for fiscal 2006 that ended last June came in at $13.1 billion.

At current prices, Sun could obviously buy back a substantial number of shares. About 570 million, if you do the math. It seems highly unlikely that Sun will ever buy that many shares back. Frankly, the company has better things to do with the money, such as invest in its future, or just keep the cash so it can make strategic investments and acquisitions. But, the pressure to show earnings per share growth will intensify for Sun now that it is in recovery mode, and particularly now that it has come off a difficult third fiscal quarter where sales in the United States slumped.

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