On Tuesday, WebMD (NASDAQ: WBMD), the online health information provider, reported a slight EPS and revenue beat, and provided guidance just above street estimates. In response, the stock traded modestly higher. This morning however, management followed the good earnings news with a nice gift to shareholders: they offered shareholders the option to tender up to 3 million shares at a $50 price, a near 6% premium above yesterday’s closing price of $47.25.
The 3 million share offer would have the company buy back 5% of its float. Such action provides a dual benefit to shareholders: it’s a nice vote of confidence in the company’s business and a great way to use its cash constructively to benefit the company’s equity owners. The smaller float itself generates a positive impact on the company’s earnings per share, as the fewer the shares, the greater the impact of each dollar of earnings per share.
Considering the hoard of cash accumulated in corporate America since the start of the financial crisis, it comes as no surprise that companies are looking for creative ways to use their cash in constructive ways. However, there is one problem with this particular tactic. When Microsoft (NASDAQ: MSFT) tried a similar share buyback in 2006, they had asked shareholders to tender up to $20 billion worth of stock. In response to Microsoft’s vote of confidence on the company’s prospects, shareholders in turn tendered only $3.8 billion worth, falling far short of management’s expectations. As a result, Microsoft shifted the majority of the tender offer to a traditional share buyback.
It remains to be seen how WebMD shareholders will respond. Considering that the stock is now trading northward of the $50 offer price, it seems as though for the small shareholder looking to sell, equity markets provide as good, if not better a price than management is offering. For now at least, all shareholders can take joy in the higher price brought about by management putting the offer out there.