tMega Members Examine the Art and Science of Share Buybacks, Strategic M&A and More
tMega, a peer group of treasurers from the word's largest companies met at host Gilead Sciences to discuss their most pressing topics. Members set their own agenda, so these are they key takeaways that are top of mind for these treasurers as we start to close out 2018.
Rethinking the Share Buyback Framework. The treasurer of a large tech company captivated the group with a description of how the company is approaching its stock buyback plan in the wake of tax reform and repatriating large amounts of cash. Here are some takeaways:
- Less Prescriptive, More Flexible. The member described the new framework as less prescriptive than the previous approach that had a specific cadence but had given up some flexibility. Now, the company is not announcing when it will execute buybacks. The company’s goal is to “embed flexibility” in timeline parameters, measuring in years, not months or quarters.
- No KPI Magic Bullet. In response to a question, the treasurer said, “I don’t think there’s a magic bullet for KPI” when evaluating the success of a share repurchase program. No matter what the size of the program, a “broader framework” is necessary to measure the program.
- Designing the Framework. The member suggested a three-point framework that included: 1. Achieving stated capital structural goals; 2. Updating the valuation thesis regularly, validating repurchase decisions through retrospective analysis and adjusting for market conditions or changing business conditions or other; and 3. Execution: taking advantage of multiple buyback tools to manage through open markets, and blackouts, while considering volatility, ADTV, VWAP and other factors to measure program success, bank execution and other factors.
Treasury’s Chance to Shine in Strategic Acquisitions. Another treasurer gave the group a fascinating look at treasury’s role in a large, complicated acquisition of a media company that was bidding for a stake in a third company. He called the M&A activity “a massive undertaking” that’s made 2018 “a dramatic year with lots of twists and turns.” Treasury served as a key partner to the M&A team in preparing the bid and in subsequent negotiation stages. Here are some insights distilled from the presentation:
- Leverage Questions Give Treasury a Bigger Seat at the M&A Table. The wide spectrum of leverage involved in the various scenarios meant treasury played a much bigger role than in most deals and was heavily involved in the negotiations. Under one scenario, the company’s leverage ratio could have reached over 4x leverage, considerably more than its target of 2. This brought “a lot of credit implications and financing possibilities,” the treasurer explained.
- Multiple Scenarios Mean Lots of Work. The huge size of the deal and the subsequent bidding for the stake in the third company meant treasury had to detail the leverage implications of three different scenarios each time it met with the board. All the work done gave the company the confidence to proceed without running scenarios by the rating agencies before bids were structured. “We thought we had a good handle on it,” the treasurer said, noting that the company always talked to the rating agencies shortly before any announcement.
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