A surefire way to build shareholder value is a
stock buyback. Just ask any of the companies that have combined to
spend hundreds of billions of dollars purchasing their shares on the
open market.

The idea is that for every share taken off the market, existing
shareholders get a bigger piece of the companies' earnings pie and, as
a result, the stock gets more valuable.

It doesn't always work out that way, however.

A Rocky Mountain News examination of Colorado companies'
stock buybacks over the past few years has found numerous companies
that plowed millions, if not hundreds of millions, into stock buybacks,
only to see the shares fall, not climb. Those companies found that
their own stock was one of the worst investments they could have made.

Other companies bought back hundreds of thousands of shares at
market prices, only to turn around and sell them back to their
employees at a steep discount through the use of stock options. The
stated goal of reducing outstanding shares was blunted as stock flooded
back onto the market through employee sales.

Taken together, these two problems represent a darker side of a tool almost universally embraced as shareholder- friendly.

"Investors should not necessarily applaud the company when a stock
buyback is announced or executed," said Todd Rosenbluth, an equity
analyst at Standard & Poor's who co-authored a November 2007 study
on buybacks. "Investors should be digging deeper and discovering what
the fundamental drivers (of the stock) are, rather than using the
announcement to decide everything's in good shape."

To examine Colorado stock buybacks, the Rocky obtained three years of data from Standard & Poor's Compustat for Colorado public companies at year-end 2007.

Nearly one in four had spent at least $10 million buying back stock
over the three-year period, with 14 of those spending more than $100
million. Four companies spent more than $1 billion, with international
cable-systems company Liberty Global leading the way with $3.65 billion
spent on buybacks.

Rick Westerman, Liberty Global's senior vice president of investor
relations, says the company has taken more than 30 percent of its
outstanding shares off the market.

"We see stock repurchases as a more shareholder-friendly way of
returning capital than paying a dividend because dividends are taxable
to certain shareholders."

Companies doing buybacks take the shares out of circulation, so they
don't have to report gains or losses as if it's an investment. To look
at companies' track record in buybacks, the Rocky examined them as if they were investments, asking this question: What did the shares repurchased in a given year return over the following 12 months?

Mixed track record

Liberty Global's mixed track record illustrates the perils of
buybacks. On the good side, the company spent $1.71 billion in 2006
buying back nearly 72 million shares. Thanks to a healthy 34.4 percent
return in 2007, that amount of Liberty Global stock gained nearly $600
million in value.

The downside: The company spent $1.86 billion in 2007 buying back
nearly 51 million shares. With Liberty Global stock down 25 percent in
2008, that amount of stock lost $461 million in value.

Westerman notes the overall market performance in 2008 has been "a
tough tape to follow," but Liberty Global has been outperforming its
peers. "It looks very accretive based on our numbers, and we obviously
know our business better than anyone else," he said.

Janus Capital, which began a buyback program in 2004, has had
similar experiences. A total of $516.6 million in share buybacks in
2006 bought stock that gained $269 million in 2007. But 2007's $845.4
million in purchases bought stock that's lost $234 million this year as
Janus has declined nearly 28 percent.

"Our long-term goal is to return excess capital to shareholders
while providing the best risk-adjusted returns," said spokeswoman
Shelley Peterson.

Peterson said Janus' average price over the past 21/2 years of $21.35 per share is below the current market price.

"It is important to note that we do take a longer-term perspective on the stock."

Discount woes

Fort Collins-based industrial company Woodward Governor has had
fabulous success with a rising share price: In 2006 it spent $130.7
million buying back stock, then saw an 86 percent return in 2007, for a
gain of $112.5 million.

The company illustrates a different problem with buybacks, however.
That tremendous increase in the company's share price made employee
stock options all the more valuable. And by 2007, stock-option
exercises were wiping out the effects of the company's repurchase
program.

In the fiscal year ended in September, Woodward Governor bought back
739,000 shares at an average price of $56.80. But employees exercised
1.21 million options, paying an average of $6.40 for their shares.

So Woodward Governor essentially was buying shares at market prices
and then selling them back to employees at nearly a 90 percent
discount. That translates to a loss of more than $37 million on the
739,000 shares used for the options.

"The two are not directly linked," said Mike Schablaske, Woodward
Governor's director of investor relations. "It's a choice made by the
company, separately, to repurchase shares."

Schablaske said Woodward Governor's stock options, like many other
companies', expire a full 10 years after they're issued, and "many
employees choose to hold their options for a long time. Our stock price
10 years ago was quite low, and that's why you see the (options')
strike price significantly lower."

The buybacks, he said, are "an appropriate way of returning cash to
shareholders. . . . We have more cash than debt, and the question is
what do we do with that?"

Paul Hodgson, a senior research associate with the Corporate Library, co-authored a share-buyback study two years ago.

"Where there is a high usage of stock to reward executives and
employees, shareholders watch the companies use their money to buy
shares to then give away to the executives as compensation. There's
potential for abuse there."

Finance Editor David Milstead can be reached at milstead@RockyMountainNews.com or 303-954-2648.

Not such a deal

Other Colorado buybacks that haven't worked so well:

* Qwest spent almost $925 million in 2007 buying
back more than 110 million shares. With the stock down almost 47
percent in 2008, that amount of stock has $427 million of value.

Qwest spokeswoman Diane Reberger says the company is balancing
investment and growth with a return to shareholders, and it expects to
return approximately $1.1 billion in 2008 through dividends and
buybacks.

* Crocs spent more than $25 million in 2007 buying
back 524,000 shares. With the stock down nearly 79 percent in 2008,
that amount of stock has lost $19.7 million of value. Any benefit from
taking the share off the market was wiped out by 3.25 million new
shares issued for stock options, exercised at an average price of $5.71.

Crocs spokeswoman Tia Mattson declined to comment.

* Guaranty Bancorp, formerly known as Centennial
Bank Holdings, bought back 3.68 million shares for a total of $37.6
million - then saw the stock fall 38.9 percent in 2007, wiping out
$14.6 million. Then, in 2007, the company bought back another 4.62
million shares for $33.4 million. The stock is down 39.6 percent in
2008, costing another $13.2 million.

Chief Financial Officer Paul Taylor says, "You have to separate the
stock buyback from the performance of the shares," which have been
affected by loan-quality issues at its northern Colorado operations.
"We paid more than what it's trading for today, and we would have loved
to pay that for all the shares. But it's a long-term good decision, and
we'd do it again."

Buyback 101

* What's a stock buyback?

A company will either offer its shareholders the opportunity to sell
stock back to the company at an announced price through a "tender
offer," or it will go into the market and buy the shares in a series of
transactions.

* Why do companies do it?

Taking shares off the market reduces the number of shares
outstanding. Each remaining share is entitled to a bigger piece of the
company's earnings, and earnings per share goes up. That should, in
theory, make the remaining shares more valuable.

* Where does the stock go?

Companies place the shares in what's called "treasury stock." It
sits there, ready to be issued back to the public if the company makes
an acquisition, sells shares to raise money or needs to issue a share
when an employee uses a stock option.

* Do share buybacks work?

A November 2007 study by Standard & Poor's found that only one
out of four S&P 500 companies that repurchased shares outperformed
the Index from Jan, 1, 2006, to June 30, 2007. S&P found the 20
billion shares repurchased during the study period contributed to only
a 4.4 billion share reduction in the total outstanding shares for
companies actively buying back stock. That's because companies blunted
the impact by giving stock options to their employees and issued new
shares to make acquisitions.