Conference 7.286::digital

          <<< HUMAN::DISK$HUMAN_WRKD:[NOTES$LIBRARY]DIGITAL.NOTE;1 >>>
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Note 642.0*             STOCK BUYBACK - TAKEOVER DEFENSE?             No replies
NOVA::M_DAVIS "Eat dessert first;life is uncertain." 11 lines  26-OCT-1988 11:41
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    Yesterday, DIGITAL announced it will buy back 10,000,000 shares of its
    stock.  This is approximately 8 or 9 per cent of those shares
    outstanding.  
    
    The perennial AT&T takeover rumor has once again surfaced.  For
    further information on the stock buyback and for detailed information
    on the financial positions of both companys, see note #1170 of the
    BMT::Investing notes conference.  Press kp7 or Select.
    
    Marge 

 
	-------<People, Products, or Cosmetics?>----------

	***********************************************************
	 After some discussion with the moderator, I would like to
	 clarify the concern I tried to express in my base note.
         Please note that my interest is not in the pro's and con's
    	 as an investment, or in our product mix, but in priorities,
    	 especially PEOPLE here at DEC.
    	***********************************************************

	The Cosmetics......

	The cost of the stock buy-back is approximately equal to 
	the pared-down engineering budget for FY89.  This buy-back 
	indicates that DEC values the short-term results so much that 
	we are prepared to DOUBLE our spending this year to make a 
	cosmetic fix.  Note that few fund managers recommend buying 
	DEC stock now.

			....but what about our products?

	Serious cuts were made in the engineering budget to REDUCE 
	this year expenses.  This 'affordability' crunch was painful,
	since any reduction in engineering now has a significant 
	effect on the later years product portfolio.  This drive to 
	reduce expenses led to project cancellations, redirections, 
	etc.  The effects of the engineering budget reduction on 
	manufacturing are also beginning to surface now.  

	However, the real cost is its effect on PEOPLE....

	The wholesale cancellations and redirections have led to 
	many of us being catagorized 'reassignable'.  As a result,
	we are REQUIRED to find comparable employment elsewhere 
	in DEC.  (Bet you didn't know DEC has a 'transition POLICY'
	for reassignable employees did you?)  This has had a direct 
	and very negative effect on many of us who are working for 
	DEC today.  

	...So, what is the message here?...

	It is very disturbing to me to think that we have undergone 
	this 'affordability' trauma for the express purpose of being
	able to afford a stock buy-back.  

	Is this buy-back more important to DEC than the people working 
	at DEC?  Is it as important as our future product portfolio?
	If willingness to spend is any indication, then the answer is 
	clear; our individual well being and our product strategy CAN 
	be exchanged for a short-term cosmetic fix for our bottom line.
	
	This is a very sobering message about OUR changing workplace.
	

Tim B.

    

I also am concerned about DEC's apparently decreasing commitment to
engineering, especially hardware development. Is DEC decreasing net
investment in hardware development?  I've heard of a couple of
satellite hardware groups which are losing their hardware charters,
and DEC's tradition of entrepreneurial product startup seems to be
becoming a thing of the past.  The funding that let competitive or
non-traditional product developments start up seems to be fading away.

Its the last one that worries me most.  I sometimes think that, to
save money, management is now far less willing to fund anything more
than one development effort in each well-defined product space. If
true, this is a shame. In the CPU space (the corner of the world I'm
from) it often seemed to me that some competition was necessary to
bring out the best product. Even though some products lose, the ones
that win are pressed to meet higher goals in order to compete.  I can
think of more than one successful DEC product that started as a
'backup' effort and either ended up surpassing the original product,
or forced the original product to exceed its original goals. Another
outcome is that products that don't fit well into traditional (e.g.,
marketing-defined) slots get far less chance to bear fruit, hastening
the end of the back-room development effort, and our successes with 
non-traditional products. 

I wonder, as .0 says, if we have the realistic need to save every
dollar, and whether we can really afford to cut development spending
now. Does anyone have a more upbeat perspective on this?  Though I
know all things go in cycles, I'm concerned whether we will ever
return to the more free-wheeling, fast-growing DEC of years past..... 

/j 

    That cash was a liability (even though it was listed as an asset...).
    Our declining stock price was getting dangerously close to our book
    value. Also I understand that our real estate and manufacturing
    facilities are worth far more than they are carried for on the balance
    sheet.
    
    So I ask how would you feel if KKR or or other Wall Street takeover
    artists decided that they could make a few million bucks by a hostile
    takeover and then asset stripping the company.
    
    Buying back our stock reduces the book value, supports the share
    price and leaves less money in the bank that would help a potential
    hostile raider. Also I suspect that this stock buyback isn't the
    only thing that the company is doing to make itself less palitable
    to a raider.
    
    In addition maybe we CAN'T spend the money, I know that I'm trying
    to hire engineers for engineering IBM Interconnect products and
    qualified candidates seem few and far between. I presume other groups
    who have the money are also having equal difficulty in spending
    it.
    
    Dave

    Don't think of  a  stock buy-back as an expense, look at it as paying
    back a debt,  it  reduces the liabilities of the  corporation.    And
    since the rumors were high on a take-over,  then  it  was  the  right
    thing to do.
    
    Also don't feel that it  is  only  engineering  that  is tighting its
    belt, it is across the board.
    
    OD/

If your stock is undervalued (like ours) and you have the cash, it makes a 
lot of sense to buy back some stock.

If you are a possible takeover target, it makes sense to lower your book 
value, and liquidate excess cash on hand.

Digital can't just pour all of its dollars into R&D... there has to be a 
reasonable investment, based on expected returns.  All the great products
in the world are useless without a market for them, and our customers can
only spend so much money in a given time frame... so it makes sense to 
reinvest our earnings at a reasonable rate to insure that the products that
we develop will be marketable at a fair price.   Too much all at once, and
everyone loses.

Bob

    re: .5
    
    Stock is not a liability of the corporation.  We are not legally
    bound to pay our stockholders back anything.  This is one reason
    companies issue stock instead of bonds.  Bonds have to be repaid,
    stock does not.
    

    Sorry, when this conversation strays into investing topics, it's
    usually taking a wrong turn.
    
    Common stock is a form of equity, a form of liability, not an asset.
    
    If the company were liquidated or broken up, common stock holders would
    receive the entire value of the company after payroll, taxes, vendors,
    bondholders, and others are paid.

        Pat has explained it quite well.  If you look at the Consolidated
        Balance Sheets (e.g., on page 15 in the First Quarter Report that
        you may have recently received if you're a stockholder) you'll see
        that Digital's outstanding common stock is listed with the
        Liabilities under the "Liabilities and Stockholders' Equity"
        category, not under the "Assets" category. 
        
        Now, if Digital were buying stock of other companies, that might
        be listed as an asset, perhaps under the "Cash and temporary cash
        investments" category, or the "Other assets, net" category. 
        
        Tom

	From VTX LIEWIRE

                 Digital announces intention to purchase    
                 to five million shares of its common stock 

  Digital today announced that its Board of Directors has authorized the 
  open-market purchase for cash of up to 5 million shares of the company's 
  common stock.  This represents approximately 4.1 percent of the company's 
  outstanding shares.  The total number of shares of common stock outstanding, 
  as of April 20, 1990, was 122,066,922 shares.
 
  Jim Osterhoff, vice president, Finance, said "We believe the current market 
  value of Digital stock does not reflect the underlying strengths of the 
  company - it's customers, products and the markets it serves, as well as its 
  strong financial position.  Our investment decision reinforces management's 
  long-term commitment and confidence in Digital's future.  This is an 
  opportunity to build further shareholder value."

  The company has already repurchased 18 million shares of its common stock on 
  the open market for $2.1 billion in cash over the last several years.

Re: .10

>	From VTX LIEWIRE

Freudian slip? :-)

				-- Bob

	A slip to be sure. LIVEWIRE usually has the truth in it. Not always
	as much in it as I'd like but what is there is pretty reliable.

	So would someone explain again, for slow people like myself, just
	why this buyback of stock is such a good idea? As a stock holder I'd
	like to see me paid more. :-)

			Alfred

    Let's see. Over the past several years, we've bought 18M shares 
    @ $2.1B = $116.667/share.
    
    Ouch?
    
    Steve.

re: .12

Well, I'm not an financial expert but I can see two reasons for doing so:

First, less shares on the open market therefore it would be harder for
some group/person to grab enough for a take over bid, and second, I would
think that it would make the remaining shares worth more.

- George

    
    re:
    
>First, less shares on the open market therefore it would be harder for
>some group/person to grab enough for a take over bid
    
    I think you're wrong here. The only shares that count are the ones that
    are on the open market. Shares that are bought back by the company have
    0 voting rights and don't count in earnings per share calculations.
    It's just treasury stock that may be reissued later or retired.
    Treasury stock is carried on the balance sheet as a negative component
    of owners equity and not as an asset. As far as a raider is concerned
    it makes no difference whether a company is carrying treasury stock
    on its balance sheet. What may make a difference though is how much
    cash is being carried on the Asset side. Of course as you point out,
    with less issued stock Earnings per share should be higher which in
    theory should at raise the share price or at least support it.
    
    Dave

	Actually since once the company buys the stock they can't vote
	it wouldn't there being fewer shares out there mean that it would
	take fewer shares to account for controlling interest?

	If we have enough cash to buy back stock we probably don't need to
	go to the market to raise money so how does raising the price of
	a share of stock help Digital? Yes it makes the stock that much
	more valuable to the stock holders and I realize that is concidered
	a good thing but aren't there other things, things for the long run,
	that we could be doing with that money?

			Alfred

    The loss in value of the shares bought is about 650 million dollars.
    
    With that money we could have done a lot of real work--it represents
    over 4000 engineer-years!
    
    			-John Bishop

    
    Re:
    
>	If we have enough cash to buy back stock we probably don't need to
>	go to the market to raise money so how does raising the price of
>	a share of stock help Digital?
    
    I'm not sure I understand your point here. Digital the company is owned
    by its stockholders. KO et al are just agents who manage the company on
    behalf of the stockholders. The number one goal of these agents is
    to maximize the wealth of the companies owners. Sometimes this
    is done by buying back stock thus making the outstanding stock
    more valuable. Typically a companies board (notice I said board not
    CEO) decide to buy back stock if they believe that they have no good
    use for cash. This happens if the company does not feel it wise to
    expand through investing that cash, presumably because any project it
    could put that cash into is seen to have a too low IRR. Now some
    people may say that that implies that the companies management must
    be pretty short sighted if they can't see any good invesments. I don't
    wish to argue that one way or the other.
    
    Dave

    Several times over the past 5-8 years or so, the board of directors has
    approved repurchasing shares on the open market instead of creating
    more shares in support of things like stock options and the Employee
    purchase plan.  Is that what is being done here?  Personally, I'd
    rather see us buy back then create more.

    Company stock purchases tend to raise the value of the remaining
    shares, thus making it somewhat more expensive for outsiders to
    mount a hostile takeover.  A company with good cash reserves, and
    a low stock price is a target for breakup or milking.
    
    On the other hand, good cash reserves can be invested in new product
    development, or seed capital for spinoff organizations that may
    create new markets.  Sucess here will also tend to raise the value
    of shares.
    
    I would feel better about the future prospects, if cash were being
    invested in spinoffs and new products.
    
    
    
     

Making investments represents an expense which reduces profits and depresses
the value of the stock further.

    Also buying back stock is a bit like issuing a dividend.
    
    Dave

    At the Digital Quarterly Report (broadcast on DVN today) Jack
    Smith and Ko said that the purpose was to increase stockholders
    value. A newspaper report (AP I think) in tonights papers said 
    that some of the buyback would be used for employee stock purchase.
    
    		Alfred

>        Company stock purchases tend to raise the value of the remaining
>    shares, thus making it somewhat more expensive for outsiders to
>    mount a hostile takeover.  A company with good cash reserves, and

    Not really, since although the shares are individually more valuable,
    there would be fewer of them; in short, the total market value should
    be approximately the same.  
    
    Mark.
         

    RE: <<< Note 652.24 by NWD002::LOOI_MA >>>

>>    ... tend to raise the value of the remaining shares, ...
    
>   ...the shares are individually more valuable,...
   
    
         I think you are inadvertently agreeing with each other.
    
                                     Greg

    ...and potential buyer would also buy stock DEC owned.
    Asset as good as money in the bank (hmm).

	Re: .25

	Greg,

	Please reread all of .24 and I think you'll see that you took one phrase
in both the quote and the reply out of context by ignoring all the rest of the
reply.  Mark is saying, correctly, that even though the individual share prices
should go up, the aggregate cost of taking over the company would remain the
same.  The takeover cost is based on the number of outstanding shares multipled
by their value (plus, of course, any value run-up during the takeover battles).
For example, a million shares at 100 is pretty much the same for taking over a
company as if it had 1/2 million at 200.  In either case, the total value of the
stock would be 1 billion and thus a bit more than 1/2 billion is needed to take
it over.  (Ignoring, again, any run-up during the takeover battle.)  The
shareholder that bought at 100 and now holds stock worth 200 would be happy,
however, with or without a takeover.

	Obviously fake numbers were used in this example.  The real situation
makes the number much less clean to talk about.

								-craig

Re: .27

Let's say company X has a million shares outstanding at $100 a share, which
means it has shareholder equity of $100 million (not $1 billion, of course).
By coincidence, let's say that the company also has a net value of $100
milllion.  It decides to buy back 500,000 shares at $100 per share.  Now the
company has 500,000 outstanding shares at $100 each, but it is also worth only
$50 million (it had to make a cash payment of $50 million to the stockholders
who sold their shares).  Why would the remaining stock increase to $200 a
share?

				-- Bob

Re: .28

Extending my example...

Let's say that company X has 1 million outstanding shares at $100, but it has
a net value of $150 million.  Obviously it's a prime candidate for a takeover:
someone with deep enough pockets could make a profit of $50 million by
buying $100 million worth of stock (although really they wouldn't buy all the
stock, so they'd spend less but make less profit).

Because their stock is undervalued, company X might decide to buy back 500,000
shares at $100 each.  Then the company would have 500,000 shares at $100 each,
but would have a net value of $100 million.  The remaining shares would have a
true value of $200 each rather than $150, thus rewarding the stockholders
(including the board of directors) who held on to their stock.  However,
it would make the company even more of a takeover target (assuming the
remaining stockholders were willing to sell their shares at $100 each): a
$50 million investment would yield $50 million profit.

Presumably the stock market, seeing company X buy back half of its own
stock, would wake up to the fact that the stock was undervalued and the
stock's market price would go up, perhaps as high as $200 a share, thus
removing the take-over threat.

By the way, my example is over-simplified because a company's true value is
not just the value of its assets but also its potential for future earnings
(loyal customer base, trade secrets etc.).

				-- Bob

	Re: .28

	Oops, sorry about the multiplication error.  It was the end of a long
day...  Yes, in my example the figure should be $100 million.  Now, back to
your example.  The problem is with the statement you made of:

>           It decides to buy back 500,000 shares at $100 each,

The value of each share is set by supply and demand.  A company coming in and
deciding to buy back 50% of its shares in our examples will greatly increase
the overall demand for the stock, therefore the price will go up.  If the
company tried to buy back the 500,000 shares and told its broker "pay no more
than $100 per share", they would only get a very small portion of the 500,000
shares before the overall new demand level pushed the price above $100.  This
is why the recent stock buy-back announcement didn't include a price for the
shares -- the Board of Directors just can't set the price, the market does.
What the Board can do is guestimate how the price will fluctuate due to the
buyback and agree that the "worst case" costs (ie. the stock immediately jumps
up to the new level) are reasonable.

	This covers only normal open-market purchases, of course.  A company
trying to take over another company by offering a tender price much higher than
the current market value is another story.

							-craig
	

Re: .28


>Let's say company X has a million shares outstanding at $100 a share, which
>means it has shareholder equity of $100 million (not $1 billion, of course).
>By coincidence, let's say that the company also has a net value of $100
>milllion.  It decides to buy back 500,000 shares at $100 per share.  Now the
>company has 500,000 outstanding shares at $100 each, but it is also worth only
>$50 million (it had to make a cash payment of $50 million to the stockholders
>who sold their shares).  

	Hi, Bob,
	Not sure how we're figuring "value" here, since there are 
	different ways of defining it.  If we mean "net worth," then
	that includes not only stuff like number of shares, but also
	paid-in capital/retained earnings.  If the company buys its
	own stock back, will the equity position really change?

	Also, not clear how we're defining the value of a share-
	book value or market value.


>Presumably the stock market, seeing company X buy back half of its own
>stock, would wake up to the fact that the stock was undervalued and the
>stock's market price would go up, perhaps as high as $200 a share, thus
>removing the take-over threat.

	On the other hand, perhaps the stockholders would object, because 
    	they would have liked the cash paid out to them as higher dividends.  
    	Or perhaps the stockholders would welcome a takeover, since it may 
    	give them a chance to get a good return on their investment- that is,
	management may see a takeover attempt as a "threat," but a
	shareholder may see it as a legitimate opportunity to increase 
	his wealth.

	Incidentally, some other interesting things that help make companies 
	better takeover targets include things like high cash holding, and very 
	low debt.

		Dave

Re: .30, .31

Yes, there were some effects that my example didn't take into account, but
I don't think that this invalidates the point I was making (assuming that there
was a point! -- really I'm just trying to get a handle on what happens when
companies buy back their own stock).

Re: .30

>>           It decides to buy back 500,000 shares at $100 each,
>
>The value of each share is set by supply and demand.  A company coming in and
>deciding to buy back 50% of its shares in our examples will greatly increase
>the overall demand for the stock, therefore the price will go up.

Right.  For simplicity, in .29 I assumed that this happened in two steps:
(a) the company buys back half its stock at $100, (b) the market value
increases to as much as $200.  In reality, effect (b) would start to kick in
before step (a) was complete.

Maybe a more realistic example is: the company, valuing its stock at $150 a
share, tells its broker "buy back up to half the stock for no more than $140 a
share".  The average purchase price was actually $125, say, and the company
bought back 500,000 shares, meaning that it had to shell out $62.5 million.
The company was worth $150 million before the buy back, so it is worth $87.5
million after the buy back.  There are 500,000 shares outstanding, so each
share has a true value of $175.  Each shareholder who kept their stock made a
potential profit of $25 per share ($150 before the buy back, $175 after), at
the expense of those who sold for an average of $125.  The stock's market value
has gone from $100 a share to over $125.

However, the only reason this happened, as far as I can see, is that the
stock was undervalued to begin with.  Let's take the example I gave in .28,
where the company had a true value of only $100 million instead of $150
million.  The company (perhaps over-estimating its true value) tells its
broker "buy back up to half the stock for no more than $140 a share".  The
average purchase price was again $125, and the company bought back 500,000
shares, spending $62.5 million and reducing the company's true value to
a mere $37.5 million.  There are 500,000 shares outstanding, so each share
has a true value of only $75 -- but a market value of $125!

Obviously something is wrong with this picture: I've assumed that the stock
market has no idea of the company's true value.  In reality, in the second
example where the stock was already selling for its true value there is no
reason why the stock should increase in value if the company bought some of
it back.  There might be a temporary increase in the price, but it would
go back down again once the market realized that the stock had become
overvalued.

Re: .31

>	Not sure how we're figuring "value" here, since there are 
>	different ways of defining it.  If we mean "net worth," then
>	that includes not only stuff like number of shares, but also
>	paid-in capital/retained earnings.  If the company buys its
>	own stock back, will the equity position really change?

Yes, of course it will change!  A $100 or $150 million company doesn't give
away $62.5 million in exchange for pieces of paper without having that reduce
its value.  You're right that it's not as simple as in my example
($150 million - $62.5 million = %87.5 million), but I'd guess that it's of
at least some value in modelling the real situation.

Maybe someone with a business background can plug in some numbers for things
like paid-in capital, which I don't completely understand, but I don't think
that will essentially change anything.  Say the stock originally sold for
$10 a share (this being a company that had rapid growth in the past), there
would be a liability of $10 million in paid-in-capital before the buy-back
and $5 million after it.  This doesn't change the fact that the company is
worth $62.5 million less after the buy back; both before and after the
buy back, $10 out of every share represents paid-in capital rather than
profit.  Why should this matter?

>	Also, not clear how we're defining the value of a share-
>	book value or market value.

I admit that I'm ignorant of a lot of the technical terms.  In my usage,
"market value" means the price you could get for a share on the
stock market, and "true value" is really an imaginary number that reflects
both the assets of the company and its future earnings.  In reality no one
would really know the true value of the stock; all they could do is guess.

>	On the other hand, perhaps the stockholders would object, because 
>    	they would have liked the cash paid out to them as higher dividends.  

Isn't that basically the same thing: the company pays out its profits in
dividends, making it a smaller company.  Either way, you decrease the net
value of the company in the hope of increasing the value of each share.

Let's say the $100 million company in my example decided to pay $10 million
in dividends, instead of buying back stock.  After paying the dividend,
the company would be worth $90 million, so each share would have a true
value of only $90.  Since each stockolder also got a $10 dividend, they
would break even.  Of course the market price might go up temporarily
since the stock seemed to be more valuable (paying a dividend would be
a sign that the company had confidence in itself) but in the long run I'd
think the market would have a reasonably good idea of the stock's true
value.

Likewise in the $150 million example where the stock was undervalued, if
the company paid a $10 million dividend it would be worth only $140 million,
so the true value of each share would drop to $140.  Its market price
might increase if the market re-appraised its estimate of the company's
value.

>    	Or perhaps the stockholders would welcome a takeover, since it may 
>    	give them a chance to get a good return on their investment- that is,
>	management may see a takeover attempt as a "threat," but a
>	shareholder may see it as a legitimate opportunity to increase 
>	his wealth.

Well, in my example the buy back did *not* reduce the threat of a takeover,
at least not directly; it actually increased it.  Since the stock was
over-valued, the directors decided on a buy back so that the average values
of the shares held by those who did not sell their stock would increase at
the expense of those who did sell.  (Presumably, the directors themselves
would not sell their stock). This had no effect on the excess value
of the company (the potential profit to be made by the takeover artist) --
until we account for the fact that the market price might go up as the
market increased its estimate of the average value of a share.

As long as the market undervalues the stock the directors have no way (in
my examples) to prevent a takeover artist from buying the company and making
up to $50 million profit.  All they can do is to increase the average value of
each share in order to increase the value their own shares at the expense
of those who are willing to sell at the undervalued price.

>	Incidentally, some other interesting things that help make companies 
>	better takeover targets include things like high cash holding, and very 
>	low debt.

Yes, this is interesting...

I think Digital would lose a lot of its "true value" in the event of a
takeover, with a possible max exodus of valuable employees.  However, as
someone pointed out to me: given the current economic climate, where would
these people go?


				-- Bob

Re: .32

>Re: .31
>
>>	Not sure how we're figuring "value" here, since there are 
>>	different ways of defining it.  If we mean "net worth," then
>>	that includes not only stuff like number of shares, but also
>>	paid-in capital/retained earnings.  If the company buys its
>>	own stock back, will the equity position really change?
>
>Yes, of course it will change!  A $100 or $150 million company doesn't give
>away $62.5 million in exchange for pieces of paper without having that reduce
>its value.  You're right that it's not as simple as in my example
>($150 million - $62.5 million = %87.5 million), but I'd guess that it's of
>at least some value in modelling the real situation.

After thinking about this a little more, I think I misunderstood the question.

Let's say each share has a par value of $10.  Here is the $150 million
company's balance sheet before the buy back (neglecting the fact that in my
examples I've been assuming that the $150 million factors in future earnings as
well as assets, and making the optimistic assumption that I understand the
technical terms used in the question):

	retained earnings	$150 million
	paid-in capital		$ 10 million
				------------
	net worth		$140 million

Each share has a par value of $10, plus a one millionth share of the $140
million in net worth, giving it a true value of $150 (even though it sells for
only $100 on the stock market)

After the $62.5 million buy back:

	retained earnings	$ 87.5 million
	paid-in capital		$  5   million
				---------------
	net worth		$ 82.5 million

Each share has a par value of $10, plus a one 500,000th share of the $82.5
million in net worth, giving it a true value of $175 (even though it sells
for only $125 on the stock market).

In other words, the paid-in capital is the same per share before and after
the buy back, so it has no effect on the "true value" of a share.  This
would be true even if the par value were $100 rather than $10 -- it simply
doesn't matter.

Now for the $64,000 question to Pat Sweeney: am I even close?

				-- Bob

In .32 I said:

>As long as the market undervalues the stock the directors have no way (in
>my examples) to prevent a takeover artist from buying the company and making
>up to $50 million profit. 

This is obviously wrong.  If nothing else, the directors could sell off the
company themselves and distribute the proceeds to the stockholders.  Of course,
this might put a lot of people out of work.

>>	On the other hand, perhaps the stockholders would object, because 
>>    	they would have liked the cash paid out to them as higher dividends.  
>
>Isn't that basically the same thing: the company pays out its profits in
>dividends, making it a smaller company.  Either way, you decrease the net
>value of the company in the hope of increasing the value of each share.

After I wrote this, it occurred to me that there is an important difference
between a stock buyback and a dividend.  A dividend benefits all stockholders
equally in proportion to the number of shares that they hold.  A stock buyback
rewards stockholders who know the true value of the company: if the stock
is over-priced it is profitable to sell it, and if the stock is under-priced
it is profitable to hold on to it and buy more of it.

Finally, another complication I didn't deal with in my examples is the
difference between a company's break-up value and it's long term value (what
I called its "true value").  A raider would be mostly interested in the
break-up value, so a company Digital might have undervalued stock without
being in danger of a takeover.

				-- Bob

    
    Just to temper some of the talk of "over-" or "under-" priced shares,
    we should recall that a company's stock selling price is usually
    related to its earnings potential.  The better the expectations for
    earnings growth, the better the price, and vise versa.  
    
    	Dave