For Corvis –- an optical networking firm with a stock price that reflects the ravages of the telecom meltdown -- the decision to repurchase a chunk of its outstanding shares doesn't seem too unusual under the circumstances.
After all, scores of blue chip companies, from Intel to IBM, have bought back their own stock in the past year as a way to stabilize share prices and signal confidence from management.
But in the case of Corvis, a company that once set a record for raising cash in its stock debut two years ago, the buyback plan has an unusual twist.
Barring a sudden surge in its stock price, the company will be repurchasing shares for less than half their cash value. As of Friday's market close, Corvis (CORV) shares were selling for 62 cents each. That's a substantial discount off the cash value of the stock, which is approximately $1.33 per share.
Corvis' Chairman and CEO, David Huber, revealed the repurchase plan in an earnings announcement Thursday, saying the decision was intended to show that "we believe in the long-term value of Corvis."
The company's high cash balance and nonexistent debt provided another incentive, said Andy Backman, vice president of investor and public relations at Corvis, adding that shares presented an "attractive opportunity" at current prices.
Backman said it's a fairly common practice for a company with shares trading below cash value to buy back its own stock. Since the company typically retires repurchased shares, buybacks reduce the amount of stock on the public market and typically increase the value of remaining shares.
What's more striking is the sheer number of once-lofty technology and telecommunications stocks that are currently valued at less than their cash holdings. Since no one else seems to want their stock, firms are buying it themselves.
Like Corvis, which is repurchasing about 10 percent of its outstanding stock, many companies are buying back shares with cash still left over from stock market debuts in last decade's Wall Street boom.
That was the scenario, at least, for AudioCodes, an Israeli developer of voice compression technology. The company announced last week that it had bought back nearly 900,000 shares of its own stock in the past quarter for an average price of just over $2 each.
AudioCodes (AUDC) raised more than $100 million in two 1999 stock offerings, and saw its shares rise above $100 the following year. The company currently has $3.10 a share in cash, no debt and a stock price of $1.82.
AlphaNet Solutions (ALPH), an IT services company with $3.19 per share in cash, no debt and a stock price of $1.48, took a similar tactic. In the last week of September, the company bought 15,000 shares of its own stock for $1.40 apiece.
Richard Erickson, the company’s CEO, said at the time that the decision made sense because "AlphaNet's stock price is clearly not aligned with the financial assets on our balance sheet."
Other companies with repurchase programs and stocks trading below cash value include Chinadotcom (CHINA), Verilink (VRLK) and ImmunoGen (IMGN). Unlike the others, Chinadotcom and Verilink do have some debt.
But in the list of former Wall Street darlings with a repurchase program, Corvis is probably the most dramatic example. The company set a record in its stock market debut in July of 2000 by raising more money on its first day of trading than any other startup in history, said Jay Ritter, a University of Florida professor who tracks IPOs.
Even more astounding, Corvis raised a record-setting $1.1 billion despite having no profit, no revenue and no products on the market at the time.
Times change. The networking firm –- which investors once collectively valued at $29 billion –- now has a market value of $255 million. The fact that shares are trading below cash value also underscores investors' doubts about the company's future.
"In general, share repurchases are good for stockholders," Ritter said. "But if a company is selling below cash, it reflects a concern that investors think the money would otherwise be wasted."
For investors fearful that the company will drain its cash on frivolous expenditures or research and development projects that go nowhere, a buyback should be an encouraging sign, Ritter said.
But Ritter said those who bought Corvis at the top should realize that a buyback won't do much to make up for their losses.
"It was crazy, a startup company being valued at $29 billion," he said. "It's not surprising that it has fallen by 99 percent since that first day."
