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May 31, 1998

Buy-back beware

Change over time

What a difference a couple of years can make. Not so long ago many European and Asian companies would not even give the time of day to the notion of venturing into the world of share buy-backs.

Almighty obstacles - some real, some convenient - lay in their path in the form of legislative difficulties, tax penalties and the like. In several markets there have been companies willing to nudge slow-moving governments toward legislative or regulatory reform by finding a way round outdated hurdles, by pushing the boundaries: Reuters in the UK, SGS in Switzerland, and Sony in Japan, to name a few which immediately come to mind.

Today, of course, other companies are happily walking the roads laid down for them by the pioneers. And rightly so. Legislative and regulatory change from the UK to Japan, from Germany to Hong Kong, is easing the buy-back process, spurred on by the drive toward that elusive goal of delivering shareholder value. As with many other trends of this ilk, the US set the pace last year with a record level of of buy-backs. This year the rest of the world will be desperately playing catch-up.

But a word or two of caution is necessary too. Buying-back huge swathes of stock does not necessarily create long-term value. Sure, in the short-term a reduction in the supply of shares is likely to push up the stock price, helping edge up overall shareholder returns. That's good news for any shareholder. And for any executive with a pile of stock options waiting in the wings to be cashed.

But in the longer term, the best investors will be the ones who question whether buy-backs are the best move for every company. Simply choosing to return cash to shareholders for short-term profit gains will not wash if it means the company is ignoring - or not actively and aggressively seeking - good investment or acquisition opportunities. Sure, most investors would hate to see a company sitting on an unnecessarily large pile of cash. But most long-term investors would also prefer a carefully considered, value-creating investment to a short-term upward pressure on share price due to excessive amounts of repurchases. As Michael Bloomberg continues to make inroads into his competitors' business, perhaps there are a few Reuters stockholders who wish their company had not been quite such a buy-back pioneer.

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