GameStop: Buyback Game Theory?

 |  About: GameStop Corp. (GME)
by: Saj Karsan

Why do companies extend buyback authorizations when they haven't yet completed buybacks under previous authorizations? For example, last week GameStop (NYSE:GME) announced that it was increasing its buyback authorization to $500 million. But under the previous authorization for $300 million, $138 million still remained available. Considering that buyback announcements usually result in an immediate stock price gain (and sure enough, shares of GameStop did rise a few percentage points following the announcement), wouldn't it make more sense to exhaust the remaining $138 million at lower prices, and then later announce a new authorization for the remaining $362 million?

Instead, by going the route it did, management is making it evident that it does not want to spend that $138 million now, but may want to spend it -- and then some -- sometime soon. Under what scenario would such actions make sense? Perhaps in the case of an upcoming earnings miss?

GameStop's latest fiscal quarter ended last week, and so by now management likely has a rough idea as to how the quarter went in relation to expectations. If management anticipates a negative market reaction to the company's latest results, perhaps it feels it can get a better deal on the remaining $138 million by buying back those shares post-announcement.

At the same time, insider sales activity also shows that a director and major shareholder recently sold $30 million worth of shares. Could this be confirmation that management expects to disappoint when it reports holiday season earnings?

Of course, the above hypothetical scenario is only speculation and cannot be assumed as fact. There are other potential explanations for the dollar increase in authorization for the uncompleted buyback plan. Perhaps the company wishes to purchase debt or shares in a large block transaction (and $138 million is smaller than the block desired), or perhaps management wanted to make the announcement to temporarily boost the stock price. (The latter suggestion does appear improbable, however, as it does not gibe with GameStop management's historical long-term perspective.)

But the extension of a buyback authorization when the previous one is incomplete does seem like a strange thing to do, though for whatever reason companies appear to do it all the time. In this case, we shouldn't have to wait long to see how it plays out. Fortunately for shareholders, even a miss by tens of millions of dollars still leaves them owning a company that trades at a very low multiple to its cash flow.

Disclosure: Author has a long position in shares of GME