Through many years of ongoing research on companies in Asia Pacific and Western economies, there seems to be two general school of thoughts, aptly the Eastern way and the Western way, which might be present in either of the two groups of economies. i.e. we can find the Eastern way in Western companies, and Western way in Asia Pacific companies.
Clearly both styles have their advantages and considerations, hence the birth of this “East, West, Forward” series to possibly bridge the two approaches.
Q) Are share buybacks good for minority investors?
The short mathematical answer is yes, when a company buy back shares, the number of outstanding shares decreases, and the earnings per share increases, hence possibly causing the share price of a company to go up. All else held equal, if a current minority shareholder holds on to her share, the value of her share will be worth more.
However, through our research, we have in recent months noticed an intriguing phenomenon where companies with a Western-led mindset, in their quest to increase their earnings per share, have resorted to borrowing easy money to buy back their companies’ shares, some in drastic quantum.
Some issues might be that some world class companies touted as role-models seemed to have overdone it, including to the point where 1) they borrowed so much money to purchase their shares, that they literally reached negative Net Tangible Assets status. Caused in part due to the equity of the business decreasing (share buyback) while the liabilities increase (debt increase), and a unique blend of high goodwill due to past acquisitions of intangible “brands” and “relationships” etc. This means current shareholders who hold on to their shares will effectively be liable for more debt and hold less equity, to pay the redeeming shareholders who sold their shares.
2) because of their share buyback announcements, the valuations of some of these companies have reached all time highs while the companies are buying back their shares. But it doesn’t seem to bother the management whether they are buying their shares back at historical high levels or in a disciplined manner, as though the only thing that matters is to increase the earnings per share no matter what. Given that some of them receive their bonuses based on their companies’ share price performance and earnings per share growth, it’s quite straightforward to deduce some incentivised bias on the management part.
I wonder if we can term this phenomenon “掏空” or tunnelling – to literally dig out all the valuable treasure while they can, all in the name of “creating shareholder value”, like how grave robbers do?
The Eastern-led way, on the other hand, seems to have a more disciplined approach to the same share buyback, buying only when shares are at attractive valuations, as an afterthought after minding their core business. They are in no hurry to quickly buy more shares in order to impress (corner)stone investors by the next quarter or else! In fact, they seem to be nonchalant about such investors’ requests to quickly “create shareholder value”.

They seem to be more concerned with 3) how can they maintain their good business, spend more on research and development, and grow the business – hence growing the earnings per share nonetheless.
4) They also seem to be more conservative in growing their balance sheet strength such that they are in net cash positions, seemingly weirdly refusing to borrow easy money. It’s like they seem to understand something else that the Western-led mindset do not. It’s like they are preparing for something. But whatever they are preparing for, it’s seemingly not a large corporate bailout by authorities!
In comparing the two approaches, clearly, there is a sense of short-term gains or long-term sustainable gains. So, in determining whether share buybacks are good for the company (and minority investors) – I think it depends on whether management take it as a steroid to grow big ornamental muscles, or take it as a supplement while studiously training core muscles.
Assuming both styles have their merits, could we identify management who know how to blend the strengths of each, such that they have the best of both worlds?