Cisco Systems has announced a stock buy back of $10 billion. The company believes that its shares are undervalued in the market. By means of this move, the company expects to increase the value of the remaining shareholders’ stake.
The move is believed to counter the effort of employees selling their stock options and would protect the company’s financial image. The company believes that when stock options are exercised, it adds shares to the market, while a buyback removes them and increases the value of the remaining shareholder’s stake.
Cisco launched its stock buyback program in September 2001 and since then the company has bought back 2.3 billion shares for a total of $46.2 billion. With the recent announcement, Cisco’s board of directors has authorized to increase the total amount for buying back to $62 billion.
In a similar move, the board of directors of semiconductors manufacturer for wired and wireless communications company Broadcom, has authorized a $1 billion stock buyback program on November 15, 2007. This buyback was announced after a similar buyback of $1 billion shares completed on November 1, 2007.
Cisco’s total number of shares have declined from 7.3 billion in 2001 to 6.1 billion at the end of October 2007. The difference in the actual decline and effective decline in number of shares bought back has been partially attributed to the employees exercising stock options to the tune of 1.15 billion shares during that period. However, certain increase in the number of shares came from funding acquisitions by issuing stock.
Cisco’s share price almost doubled from $14 in 2001 to approximately $30 in November 2007. Further, the average price of the 2.3 billion shares that it bought back since 2001 was $19.89, $10 less than the level they are trading in November 2007.
Source: ComputerWire daily updates