How To Crash Your Company’s Stock So You Can Buy It Back Cheaper
August 20, 2008
This story may be true, or it may be fictitious. I refuse to say. But I’ve been wanting to tell it for a long time, so here it is.
Many years ago I worked for a company that had stock trading on a stock exchange. It may have been in the U.S. or Canada, but for the sake of the story, I will say the U.S.
This company was doing excellent business and found itself sitting on a lot of cash. As a rule, companies don’t like to sit on piles of cash. Cash is working capital, and they want to do something with it. The President called a meeting to discuss this very matter, and I happened to be at the meeting.
“We have a number of choices,” said the President. “We can buy back shares for cancellation. We can raise the dividend. We can acquire another company. We can invest new capital to expand the business. Or we can park the money in T-bills indefinitely.”
“My first choice would be to buy back shares,” said one of the others. “Except that the stock price is pretty high right now. And if we announced a buyback, it would go even higher. So I don’t know if that works for us.”
“I agree with you,” said the President. “I would love to buy back shares, but I’d prefer to see the stock twenty percent lower.”
I rarely spoke at meetings, but this time I did. “So the trick would be to make the stock go down — at least temporarily — so you could buy it back on the cheap.”
The others laughed because they thought I was joking.
The President said, “And how would you do that? Without violating any securities regulations, that is.”
“There is a way, if you want to hear it,” I said.
“We’re all ears,” said the President, smiling skeptically.
And here was the plan: the company would hire a shredding truck to come to the building at midnight. They would keep the truck on the property for two or three hours but would only be shredding some waste paper of no importance. Someone would either have to see the truck on our property or at least find out about it in order for the rumor mill to get going. Now, it was possible someone might see it, because there were a few smart guys out there who would follow a shredding truck. But to make sure the word got out, I would drive by the property and take photos. The photos would be sent anonymously to several business reporters, as well as an outfit that did research for short-sellers — i.e., digging up dirt on companies in trouble. Then we would wait for the phones to ring.
The Chief Financial Officer was to leave two days after I mailed the photos. He was to take an unscheduled vacation for two weeks and not tell us where he was going. He was literally to be out of touch. Cell phones had not been invented yet.
The President chuckled and looked around the table. Everyone else chuckled in sympathy. Then he suddenly looked serious and said, “That could actually work.” All the chuckling stopped. “I’m going to think about it,” he said.
He thought it over for a week and then decided to do it.
The shredders came, shredded some paper, and then sat around having coffee and playing euchre with the night crew. They thought it was odd, but they were told their time had been paid for and not to worry about it.
I took pictures, got them developed, and mailed them out.
Somebody took the bait. No one who hadn’t been at the meeting had been told about the shredding truck, so when the calls started coming in, the secretaries and assistants could say honestly they knew nothing about it. And the night crew wasn’t around in the daytime. The President, playing his role perfectly, calmly told callers that the shredding truck had only shredded routine scrap. Then why call them at midnight? So they could get in and out of the parking lot easily!
The callers then asked to speak to the CFO. They were told he was on an unscheduled vacation, but nobody knew where. It was true, but who would believe such a thing?
Now the rumor mill was churning in overdrive. There was undoubtedly some big trouble at the company, incriminating documents had been destroyed, and the CFO was involved! The more the President denied that there was anything wrong, the more convinced the rumor-mongers were that there was. The business media were now generally alerted, and the stock started to drop. In five trading days it was down 27%, and the CFO was still not back.
The company was buying back its stock on the open market, and the President told the inquiring media that the company was merely supporting its stock in the face of false rumors. No insiders had sold, he pointed out. But that didn’t satisfy the short-sellers or those who were dumping out of fear.
The SEC asked the company for an explanation for the sudden drop in the stock, and the President replied truthfully that it was because of false rumors, nothing more.
Normally, when a company intends to buy back a large amount of its shares for cancellation, it is supposed to make what is called a “normal course issuer bid.” But we hadn’t done that. So if we cancelled the shares as we bought them, the SEC might have something to say about it later. My suggestion to the President was that we simply return the shares to the treasury and sit on them. Then after a year or so, we could cancel them because we didn’t need them. What could the SEC say? Nothing.
The mystery of the shredding truck and the absent CFO might never be explained to anyone’s satisfaction, but eventually the market would cease to care about it, and the stock would recover. After all, there was no change in the company’s business. The SEC could sniff the air all they wanted, but they would have nothing on us, because nobody had told any lies or violated any securities regulations.
The company saved millions of dollars on all the shares it bought back and eventually cancelled. But did I get a big bonus for my brilliant scheme? “Oh, no, we couldn’t do that,” said the President. “It might arouse suspicion. However, I will take you to dinner.”
Copyright@ 2008, by Crad Kilodney, Toronto, Canada. E-mail: email@example.com