On a strong market day, RIMM opened up over 2% and, at the time of writing, is up over 4% on the day. RIMM’s share repurchase period begins today, and, so far, so good for propping up the stock.
Yesterday, I expressed my doubts that RIMM would spend the entire $1.2B that its board authorized, but I failed to provide some historical background. It turns out that the current share repurchase program is much larger in scale to a one-year repurchase program RIMM initiated in 2005.
I estimated that RIMM’s current buyback would consume all of its existing cash or 71% of its total liquid holdings. I excluded long-term investments under the assumption that those funds are not technically liquid and thus unavailable for repurchase activities. When RIMM announced on October 11, 2005 a share repurchase program of up to 9.5M common shares, it held $1.1B in cash and cash equivalents and $124M in short-term investments. Total current assets were $1.9B. RIMM also held $692M in “investments” which I assume were counted as long-term investments. (Numbers reported in “Research In Motion Reports Second Quarter Results, September 28, 2005“). Compare this to RIMM’s current balance sheet of $1.1B in cash and equivalents, $581M in short-term investments, and total current assets of $5.2B. (Side question: Is $1.1B in cash a trigger for share repurchase activity?)
RIMM ended up spending a total of $595M repurchasing shares over the course of two quarters: $391M in Q3 of 2005 and $204M in Q2 of 2006. This represented 54% of cash or 49% of liquid holdings at the time of the announcement. This means that today’s repurchase program is much larger in scale and scope.
At the time of announcing 2005’s program, management did not know how much money it would spend since the amount highly depended upon the stock price. If I very roughly assume that RIMM follows the same pattern as before and spends 49% of current liquid holdings, RIMM will allocate around $824M for repurchasing shares. That amount is 31% less than today’s maximum allotment, but it is still noteworthy. Of course, this time is “different” in that the macro-economic environment is considerably worse than four years ago, and RIMM is facing more competitive pressures than ever before. It remains to be seen whether RIMM can truly afford to spend even $824M under these conditions.
We should also take heed in how RIMM’s stock performed over the period of the last repurchase program. The stock closed up 1.6% on October 12, 2005, the day following the announcement, from a previous close of $21.01. The stock had not moved at all by the time the repurchase period began on October 17 (similar to this round). RIMM dipped as low as $17 on October 26 when news hit that RIMM could face a shutdown order in the middle of its litigation battle with NTP. By the end of the repurchase period, RIMM had appreciated 77%, closing at $37.22 on October 11, 2006. It is impossible to know how much direct impact the repurchase program had on the stock price, but RIMM’s management certainly received the end result it desired.
Be careful out there!
Full disclosure: no positions