One possible reaction to Apple’s gigantic tax-optimized share repurchase program is to think that spending a lot of time fiddling with how to optimize your share repurchase program might mean you’re out of better ideas. You can ponder whether this Intel share repurchase trade described in a Lehman Brothers bankruptcy lawsuit filed yesterday supplies any evidence on that question. Intel decided to buy back $1bn of its stock in August and September of 2008, and rather than just buy it in the market it entered into a pretty fiddly forward contract with Lehman like so:1
- Intel gives Lehman $1bn on August 29.
- Lehman hands the $1bn back to Intel for safekeeping – it’s Lehman’s money, but Intel keeps it as collateral.
- On September 29, Lehman gives Intel some shares, based on the average price of Intel stock from August 29 to September 26.2
- The dollar amount of shares Intel buys is $1bn, if the average price is $21 or below, or $250mm, if the average price is $25 or above, or some amount linearly in between if the average price is between $21 and $25:
- If the dollar amount Intel buys is less than $1 billion, Lehman gives back the extra money.
- So in other words as the stock price goes up Intel buys fewer shares, and vice versa, which is kind of wrong-way for them3 but right-way for Lehman.
- In exchange for that risk Lehman agrees to give them a discount of 10.6 cents per share.4
- The number of shares Intel buys is equal to the dollar amount divided by the average price minus 10.6 cents: