Genzyme May Be Wasting Capital on Buybacks (GENZ)
Genzyme Corporation (NASDAQ: GENZ) is trading higher this morning on news that it has entered into an accelerated share buyback plan of $1 billion in an agreement with Goldman Sachs. This is part of the $2 billion share buyback plan announced in May, but it means that it is in the market immediately buying shares.
The company noted specifically this morning that the proceeds from the recently concluded $1 billion debt offering will be used to support this first tranche of Genzyme’s overall $2 billion share repurchase plan announced in May. Genzyme will now pay $1 billion to Goldman Sachs on June 22, 2010 and will receive approximately 15.5 million shares, which the company said equates to about 80% of the shares to be repurchased based on the closing share price on June 17, 2010.
Henri Termeer, chairman and chief executive officer, calls this part of “a comprehensive five-point plan to increase shareholder value.” The company also maintains that this is a balanced plan that still includes long-term sustainable growth with a focus on core businesses and its late-stage pipeline.
The problem with share buybacks is that you never know if they work or not. There have been long studies that have shown both sides of buybacks working and then not working. The truth is somewhere in the middle. Buybacks can offset employee share dilution. The real impact is that if nothing else they are meant to act as a share stabilization mechanism. Companies cannot generally buy back so much stock in the open market that they create mega-rallies in their shares. The positive flip-side is that these buybacks do offset share sale imbalances that would otherwise drive shares south.
Here is the biggest issue of all, and there is a value conundrum here. At 24/7 Wall St., I had previously discussed turning around three biotech giants…. Of course, Genzyme was one of these and Genzyme was under $50 at the time. You have to wonder if Genzyme should be out looking for acquisitions. At 13-times forward earnings this one is a fairly cheap stock but still a premium to some turnaround peers. It could make an acquisition of a smaller player for either a new pipeline or for a new class of drugs it does not target. The problem is that any such acquisition is likely to be dilutive to earnings because most biotech companies trade at market-premiums.
If Genzyme could buy a new upcoming blockbuster drug, it might do more for the growth side of that long-term shareholder value plan. The downside is that it would almost certainly come with some earnings dilution.
Share buybacks are generally not considered a total waste. They just aren’t exactly representative of high-growth companies.
JON C. OGG
Comments
One Response to “Genzyme May Be Wasting Capital on Buybacks (GENZ)”
Leave a Reply
This is a wonderful opinion. The things mentioned are nanimous and needs to be appreciated by everyone. I like this particular article it gives me an additional input in the information a round the world. Thanks a lot and keep going with posting such information.
===============================
Stocks Resevoir