Shareholders of insurance industry software developer Ebix, Inc. (EBIX) have reveled in the company's repurchase of its common stock. Conventional wisdom holds that by reducing the number of shares outstanding through a repurchase program, a company boosts its earnings per share. The fact that repurchasing shares has no impact on operating performance seems to be lost in the discussion.
Perhaps that is because shareholders are scrambling to sell shares for what appears to be a tidy little "repurchase dividend." Over the three years ending December 2010, Ebix shareholders have been treated to share repurchases totaling 4.4 million shares valued at $36.4 million. That implies an average purchase price of $10.57 per share. Another 1.3 million were repurchased in the first six months of 2011 for $26.2 million or $20.03 per share. Put those little factoids aside for later in this article.
For now, consider the alternative of Ebix sending checks out for $36.4 million in cash dividends and the resultant tax bills that shareholders would have had to pay. From this perspective, Ebix share repurchase has been a handsome gift from Ebix CEO Robin Raina.
Conventional wisdom also holds that share repurchases signal management's view on the company's valuation or that the company's future is so bright, that it does not need the cash to support future operations. Then again, maybe management has simply run out of good ideas for investments and would rather give the money to shareholders than run the risk of plowing good money into a bad venture.
In the Ebix situation we suspect management - Robin Raina - was a bit more opportunistic. When shares are repurchased in the open market - as are nearly 95% of all repurchase programs - it reduces supply available to traders. This action can head off real or suspected hostile takeover attempts as well as frustrate the trading objectives of short-sellers. Raina has had his share of critics with a short-seller article circulating on the Seeking Alpha web site earlier in 2011. While the short-seller case was largely smoke and mirrors, the countering effects of the share repurchase may have been more effective than direct argument in keeping flames from springing up.
The other even more obvious impact of the Ebix share repurchase program is the counter it presents to the company's share issuances. Over the last five years, Ebix has issued a total of 19.8 million shares valued at approximately $95 million. In this time period employees exercised 3.4 million options and the company issued 0.4 million restricted shares. Another one million shares were issued for debt conversion. The rest was primarily for acquisitions and financings.
Ebix does not appear to have fared well in the three stock offerings it undertook in as many years. A total of 8.8 million shares were issued at an average share price of $6.12. Compare that to the $10.57 average price paid by the company in repurchasing shares. Flotation and trading costs account for part of the difference. Restrictions on the timing issuer repurchases can also lead to added costs. Nonetheless, it appears the company bought back shares at prices higher than at original issuance.
On the other hand, Ebix seems to have got a good bargain on the 6.4 million shares issued for acquisitions over the last four years - a total value of $121.1 million or an average of $19.05 per share. The A.D.A.M deal in particular appears to have been a bargain at least in terms of share issuance. The company issued 3.7 million shares at just over $23.00 per share for A.D.A.M. then turned around in the months since the deal closed to buy back 1.3 million shares for an average of $20.00 a share.
In early October 2011, Ebix issued a press release bragging about its share repurchase efforts especially in terms of anti-dilution. Although share repurchases have apparently continued in the third quarter 2011, the company would have to buy quite a few more shares back to really make that case. Nonetheless, the math seems to support the program as effective in bringing value to the company's overall capital structure and cost.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. My firm, Crystal Equity Research currently has a Buy recommendation on EBIX.