Action BUYBACK to manage income of company

For a company, the profit is a very important component. Value (number) net income or earnings per sheet Per Share (EPS) for reck by the investors and stock analysts. For example the richest man in the world, Mr. Warren Buffet, more like the shares that EPS will grow consistently. Because the shares that EPS will grow consistently show that the company is well managed and has competitive advantages.

Therefore not surprising if management has a greater incentive to “manage” EPS, and one way is with the management of EPS buy back the shares outstanding (share buyback). For example, some time ago, a telecommunications company will make a buyback worth Rp 3 trillion to increase earnings per share growth of it. First, whether the purchase back shares this (buyback) berimplikasi always helped the value of EPS? and for the shareholders, whether the impact of earnings management through the buyback of this action.


The economic and financial experts offer several theories that explain the motivation of this action buyback. Some of the objectives of the buyback are the steps to give the signal to the market that the price undervalued shares, change the capital structure and reduce free cash flow that can be misused by
management. However, in practice, the motif is often asked when making a management buyback is to push up EPS (Brav, et al., 2003).

EPS or Earning Per share figures show a net profit of companies that received any shares. There are 2 ways to calculate the most common EPS, namely: basic EPS and fully diluted EPS. Basic EPS for the technique, if the company has only ordinary shares.

While the techniques used, fully diluted EPS if the company mamakai funding instruments that can be converted into ordinary shares. For example conversion bonds, stock options and warrants.

Basic EPS is net income available to common shareholders divided by the number of ordinary shares outstanding. Net profit generated during the fiscal period, for example, a one-year, but the number of shares outstanding during the period will fluctuate if the company issued the shares some time or do
buyback. Therefore, the number of shares outstanding should be calculated based on the weighted average (time-weighted average share outstanding). These additional numbers ranging from one to zero and the beginning of the period to the end of the period.

For example: A Emiten obtain a net profit of Rp 125 billion during the year 2008, has 100 million shares beginning in 2008 and issued 50 million new shares on 30 June 2008. Weighted average shares outstanding during the year 2008 is 125 million [from (100 million x 1) + (50 million x 0.5)]. EPS for 2008 was Rp 1,000 (from Rp 125 billion divided by 125 million). To fully diluted EPS calculations more complicated because the conversion assume that the instrument has been exchanged into ordinary shares.

Buyback affect the value of EPS, both through labar net or the number of shares outstanding. Buyback impact on the number of shares outstanding buyback timing depends on it. For example, when doing emiten A buyback 10 million shares in the initial period, the shares outstanding in the period will be reduced as much as 10 million shares. If the action is done in the mid-buyback period, then this step will only reduce shares outstanding as of 5 million pieces.

Action buyback reduces the number of shares outstanding does not automatically reduce EPS, because buybuck also affect net profit. Please note that the action buyback need for cash that comes from internal company or new debt. Net profit will be reduced amount of yield (return) operation generated by the cash
used for the buyback or a reduced amount of debt interest.

According to Hribar, et al (2003), the buyback will only increase EPS if the return is missing or the payment of interest from small-to-earning ratio of price (ie, EPS divided by share price) when the buyback is done. Therefore, the buyback price is too high will damp-to-earning ratio so that the price had decreased EPS by the buyback.

And if the buyback is done near the end of the fiscal period, or if the return is missing is the return you can enjoy a new period in the future, the impact of buyback of the net profit is very small. With dmeikian, EPS this year will be increased due to the decreasing share outstanding. The full impact of this new
buyback will be felt in the period, the next fiscal period.

EPS is not always rise

From the shelf above, it can be concluded that the buyback is not always berimplikasi international value EPS. Research Hribar, et al (2003) for the buyback sample of 23,704 cases in the United States showed that only 11% of cases of successful buyback significantly increase EPS. Had it increased EPS successful, the impact of the return of a lost-because of diminishing funds to investment-may aggravate diperiode the EPS
will come.

Therefore, investors should be careful in assessing the achievement of the BPS through the buyback. Hribar found that the form of reward price premium for companies that exceed its target of the BPS using the buyback is 60% lower compared with not using the buyback.

Action management companies “manage” the profit can harm shareholders. A manager sometimes have a short insight from investors. Because of their performance is evaluated each year, managers tend to focus more on the achievement of the annual target, for example, EPS. Managers are also sensitive to the
declining share price and the company.

Buyback offers a quick solution (short term) for the second period. However, this step can only be a short-term solution with long-term costs. Cash for the buyback can actually be used to make new
investments that create added value. A question, whether the shareholders will be more prosperous if the increase in EPS this year was the performance of companies in the future? Michael Porter reminded that managers avoid myopicbehavior, namely the expense of long-term growth for the only pursue short-term

Reference Source: Articles in the newspaper Kontan written by Luke Setia Atmaja, Value Creation and Corporate Governance (VCCG) WorkGroup Prasetiya Mulya Business School.

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