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Stock Buybacks: Good for Business?

7/1/06

Computer Sciences Corp (CSC), America's number two tech outsourcer, has announced its intention to spend $2 billion buying its own stock, the latest in a string of such transactions. Do buybacks maximize shareholder value over the long term?

We think not. After CSC failed to attract a buyer for a price its board considered acceptable, and reportedly after it considered and rejected a plan to split the company in two, it turned toÖ investing in itself.

But CSC shareholders originally bought the companyís stock because of its future return and risk profile. If they wanted to buy more or less of it to balance their portfolios, they would have. Now CSC has taken that decision unto itself.

In addition, buying oneís own stock is hardly a vote of management confidence in the future. Rather itís an admission that no other more attractive opportunities exist in the business -- that no material acquisition or internal investment can compete. In the rapidly changing, increasingly global tech services industry, that decision sounds like a failure of imagination.

Last, while this may not be the case with CSC, buybacks can act as an effective anti-takeover defense. They jettison cash, hamstringing new, more effective managementís ability to grow the business.

We expect that these reasons -- and the fact that CSC failed to find a buyer -- account for CSCís stock dropping nearly 11% on the day the buy-back was announced.


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