Actually it’s not okay. You’re basically making money for investors who are “in on it” at the moment at the expense of future investors and other large investors who are just in the stock as a result of big fund diversification. My retirement money could be funding the sleazy stock sales from the insiders while they sell out the company.
It’s changing the capital structure from equity based to debt based.
Effectively it’s a change in ownership from stock holders to bond holders. Indeed it’s a sensible move if you are in a non-growth industry with stable and predictable cashflows - this is often how utility companies were financed.
It’s arguable that that was the intent of Bust Out 1.
Borrowing money to buy back stock is the opposite of funding: it's de-funding. It's the acquisition of liabilities with no offsetting acquisition of assets or future cash flows.
From an accounting standpoint it's funding-neutral: you assume a debt liability with offsetting reduction of the equity liability. This makes the return on invested capital larger, since the same profits get divided over less shares. The investors to whom the capital was returned can then invest that capital somewhere else.
It does make the company more vulnerable to economic downturns of course, since debt comes with mandatory payments that equity doesn't have. But making the tradeoff between larger profits and larger stability is what the investors hired managers for. If they don't like the tradeoffs being made, they should get different management or sell their stake in the poorly run business.
What gets me here is that bust out 1 happened after one bad holiday season to a company that was doing great the previous year. Another company in New Jersey (Toys R Us) had a similar one mistake year and ended up owned by Bain Capital -- the people who profited from the bust out weren't even part of company. Why is it that retail companies only get one strike before their stocks are pillaged leaving them crippled? Is there another market as ruthless as this?
You are looking at only two companies, not a representative sample of retailers. ANF, for example, has multiple "strikes" but they're still around. Retailers only become vulnerable to takeovers when investors lose confidence in management's competence. All other industries are equally ruthless.
In general the US still has a surplus of retail space. There will probably be more major bankruptcies in the next few years, which is fine. Let them die and more innovative companies will take their place.
Stocks and bonds (or loans) are both liabilities. Only difference is priority. Lenders have priority over shareholders in the event of a liquidation. If you own stock in a company and they're shifting from being funded by capital to being funded by debt, it mostly shouldn't matter unless they're going bankrupt, and in this case they clearly were headed that way and stockholders should have sold.
In some sense _the entire reason that companies exist_ is so that shareholders can at some point extract some money from the company and there's only two ways to do that -- either through dividends or growth. BB was (at best) clearly no longer a growth company, and stock buybacks are just dividends in disguise. They're a strong signal that you should be cashing out at least some of of your position as a stock holder while you can.
So what? It's just a change in capital structure. Most corporations are funded by a mix of equity and debt. On average, taking on some debt boosts shareholder returns despite the increased risk of bankruptcy.
> On average, taking on some debt boosts shareholder returns despite the increased risk of bankruptcy.
Define "shareholder".
The day trader? The hedge fund who wants a position for a few weeks/months? The pension fund that would like regular cash flow? The person with a retirement account that is dollar cost averaging into the market over a period of decades?
For an individual, perhaps. Even there some exceptions can be found though: taking on a mortgage to buy a house can be the right decision even though you could keep on renting and don't technically need to take on the debt.
For a business it gets much muddier: do they "need" to take on debt if it makes them more competitive in the market? A company with a well optimized capital structure containing both debt and equity can be much more profitable than a company without, and can use those extra profits to out-compete companies that are less efficient.