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How executives destroy shareholder value

|Includes: CSCO, Limelight Networks, Inc. (LLNW)

Everyone seems to understand that when the federal reserve prints massive amounts of new dollars the currency is being devalued. The more they print the worse the effect. Government can not earn money but it can either confiscate it through taxes or simply confiscate the value of it through increasing the supply.
The average citizen can not confiscate dollars or their value as those are criminal acts. They can only earn them through legitimate business activities.

What does this have to do with corporate executives is the question, and here is the answer. Companies often issue new shares of their stock. Think of this as dollars. Shareholders have some of these "dollars" in their account. When the company issues more you have to ask yourself what is the purpose and does it just confiscate value or is there legitimate business rational for it. Too often executives are cycling money. They issue shares through the stock options and use corporate money to buy them back( share buybacks), often at poor price points. In essence, transferring shareholder value directly to themselves. Or much worse they make secondary offerings of new shares into the market to raise cash. Here the question becomes even more important. Is there a business opportunity that is so important that this should be undertaken or not. Too often companies make secondary offerings to clean up bad business practices while not fixing the underlying model. Beware of these for if they continue you will later see reverse share splits to compensate for the hefty number of shares outstanding and the dwindling share price. By all means, avoid companies that believe they will turn it around, or tap a hot new opportunity if they could just have a little more of the shareholders value.

Share buybacks are sound, if its not just offsetting the employee stock-option awards. See CSCO for a bad example of this use. However, be wary when seeing either secondary offerings or buybacks being announced. Buybacks are often followed by disappointing QE's and may be used to mask falling earnings by reducing the shares outstanding. P/E looks good but gross earnings actually fell. 

The last thing any shareholder should want is a company that feels its OK to confiscate shareholder value for corporate use. Shareholders were supposed to "share " in the increase of corporate value not be a charitable donor for corporate mismanagement.
 



Disclosure: I am long CSCO.

Additional disclosure: I have no intention of buying or selling any stock mentioned in the following 72 hours.