Digging for Oil on Wall Street
The oil companies claim that they need this high prices in order to explore for new sources of oil. In fact, the amount spent for exploration is not particularly high, but such companies have their uses for their money. Buying up their own stock causes share prices to increase, as well as the executive bonuses that depend upon share prices.
The buyout firms are also causing share prices to go up. This affect is a bit different. By buying up companies with little cash and lots of debt that the companies owe to finance the takeover, share prices go up. As long as they continue to increase, the buyout companies can dump the shares back on the market at a huge profit, so long as investors are expecting shares to go up still more.
This tactic is similar to efforts to corner the market, except that the buyout companies aren’t able to corner the entire stock market. However, if they try to dump too many companies back on the market — especially companies that are hobbled by excessive debt — the stock market could stumble and even set off a panic.
Lahart, Justin. 2007. “Shares Head to the Sidelines: At What Cost?” Wall Street Journal (9 April): p. C 1.
“Shares of U.S. companies are getting retired like never before. According to the Federal Reserve, a record of a net $548 billion of stock was taken off the market last year, up from the old record — set the year before — of $295 billion.”
“Companies in the Standard & Poor’s 500 purchased $432 billion of their shares last year, according to S&P’s senior index analyst Howard Silverblatt, more than enough to sop up the shares they issued. Exxon Mobil is the standard bearer here. It spent $29.6 billion — just a bit shy of where the market now values oil-services giant Halliburton — taking its number of shares outstanding to 5.97 billion from 6.32 billion.”
“”Buyouts, where public companies get taken private, are also draining shares off the U.S. stock market. Private-equity buyout firms were behind five of the 10 largest takeover deals last year, as the likes of hospital giant HCA were privatized.”
Exxon’s stock-market valuation went from $355 billion at the end of 2005 to $457 billion at the end of 2006 for a 29% gain. But its share price went from $56.17 to $76.63 — a 36% gain.”
[Executive bonuses often depend on share prices.]
“When a buyout target goes public again, it … will also be saddled with the debt the buyout firms used to finance its takeover.”