Stock buybacks: the corporate con you're still falling for.

• Author: Fischetti, Mark

Mark Fischetti is a writer in Great Barrington, Massachusetts.

Instead of putting capital into new Plants and improved products, America's CEOs bad a better idea: They invested it in themselves

Late one night, while waiting for the company limousine, you pour yourself a drink and ponder your life as a CEO: the bonuses, the golden parachute, the private elevator with the polished doors. Perfect-or rather, it would be, if it weren't for those busybody shareholders constantly whining that their stock is stalled. What to do? Invest in a new plant and expand production? Pay a few dweebs in white coats to develop some new techno-doohickey that'll really wow Wall Street? . . . Nah, the very thoughts make you tired. Life is so unfair, you think. If only you could boost stock prices, get rid of some shareholders, and maybe reap a few million bucks for yourself in the process. All without really working.

You can. In fact, CEOs have been doing it for years, thanks to Wall Street's best-kept secret: the stock buyback plan. For a classic demonstration, consider the owners of the Washington Redskins. Back in the early seventies, Jack Kent Cooke, Milton King, and Edward Bennett Williams sat on the board of Pro Football Inc., the parent company of the Redskins. From that position, they quietly bought out other shareholders to take complete ownership of the team. It was quite an expensive purchase-which is why they used other people's money to make it.

During the sixties, George Preston Marshall owned 520 of the 1,000 shares in Pro Football, Williams and his two cohorts held minority positions, and the public held the rest. As Williams came to control more of the daily activities of the company, he directed Pro Football to begin buying back public shares, using company money, for the sole purpose of increasing the board members' relative share. Then, after Marshall died in 1972, Williams--the executor of Marshall's estate-had Pro Football buy and retire Marshall's 520 shares. That transaction alone cost Pro Football $8.8 million, but when they were through, Williams, Cooke, and King owned the entire franchise.

Problem was, the Redskins had nowhere near that kind of money. So the trio put Pro Football into debt-major debt-to finance the purchases. Although the three owners wouldn't talk, sources at Sports Illustrated and The Washington Post put the debt service alone at between $600,000 and 1 million per year. And Joe Fan picked up the tab. By 1978, the Redskins had the highest ticket prices in the National Football League. Williams, Cooke, and King had managed to bill consumers- in this case ticket buyers-to get control of the company, and of its profits. Today, industry watchers estimate that, thanks to soaring TV revenues, the franchise is worth over $150 million, 10 times what it was worth in 1972. There are no outside stockholders left to benefit from that surge. And Cooke, the only surviving member of the original troika, sure hasn't shared the wealth (in the form, say, of cut-rate tickets) with the little people who made it all possible.

Stock response

By now, we've all heard the cautionary tales: How Kravis, Bass, and other corporate raiders made billions during the eighties while driving American companies into debt, impervious to the impact on jobs or national competitiveness. Stock buybacks have many of the same effects-they just work more insidiously, since nobody's complaining. Last year, U.S. companies bought back more than $12 billion in stock, according to Goldman Sachs partner Steven Einhorn. That money generally didn't result in better cars, lower food prices, or even cheaper tickets to Redskins' games. It didn't result in leaner, smarter business management. It didn't help us as we slid further into recession, unable to trade our wares in a tight international market. It did result in hefty profits for the executives who engineered the deals.

In major food, metal, manufacturing, and other companies across the U.S., CEOs divert millions of dollars from the quest for innovative products, breakthrough production technologies, cleaner waste management, and better-paying jobs. Then they spend it all manipulating the market to enrich themselves and their shareholders.

So why haven't you heard about this corporate con? Because most business managers, stock analysts, and reporters have fallen for the buyback's illusory benefits.

Even the most savvy dailies and trade magazines are infatuated with buybacks. As Quantum Chemical took on crippling loans to finance a buyback, Forbes ran a story called "Saddled with Debt But Still Able to Grow." A Wall Street Journal story about dividends fueled by buybacks bore the headline, "Metals Producers Are Basking in a Cash...