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Do tech stock buybacks work?

Technology companies this week announced stock buybacks to show confidence in the stock market, but a big question lingers: Can the strategy help settle the tumultuous financial markets?

Technology companies this week announced stock buybacks to show patriotism and confidence in the stock market and their businesses, but a big question lingers: Can the strategy help settle the tumultuous financial markets?

Although there is little hard data, many analysts say stock buybacks offer a psychological balm in the aftermath of last week's terrorist attacks--but little more. In addition, companies may announce buybacks but not follow through with actual stock purchases. On Monday, technology shares still struggled despite a spate of buyback plans from the likes of BEA Systems, Cisco Systems, DoubleClick, Intel and Siebel Systems, to name a few.

"The buybacks may have helped at the margin, but it's more psychology than anything," said Joseph LaVorgna, an economist at Deutsche Banc Alex Brown, who noted that the Federal Reserve's recent interest-rate cut sent a more poignant message to investors. "I'm not sure the buybacks were even icing on the cake. They were more like condiments off to the side."

Under the temporary guidelines designed to prop up the stock markets, the Securities and Exchange Commission allowed public companies to buy their own shares without volume and timing restrictions, eliminating such rules as no buybacks in the first and last 30 minutes of trading. The SEC also changed some accounting regulations, allowing public companies to repurchase their shares without adverse accounting consequences.

The SEC had hoped the buybacks would aid in boosting investor confidence. Considering the Dow Jones industrial average and Nasdaq lost about 7 percent each on Monday, it's hard to assess the benefit. Shares also fell, however slightly, in Tuesday trading.

Tech companies note that the buybacks may or may not have occurred on Monday when their stock prices were depressed. If buying did occur, it didn't do much. Companies contacted wouldn't reveal whether they actually bought shares Monday.

Cisco CEO John Chambers said the company's buyback plans, which could account for 3 percent of the company's shares outstanding at current prices, showed the company was confident in its future, not to mention the stock market. Other executives echoed those comments.

Jeff Young, a spokesman for Akamai, said its stock buyback plan was designed to show confidence that the company's business and the market will succeed. As for Akamai's buying plans, Young noted that "we're just monitoring how the market goes" and picking spots to buy shares back.

Conventional wisdom
The consensus among analysts is that share buybacks can boost earnings per share since they cut the shares outstanding. Better earnings can also justify higher stock prices. Stock buybacks are encouraging because it shows a company has the cash to invest in itself.

But in a tech recession, some analysts are wondering whether stock buybacks have much of an effect. According to LaVorgna, buybacks don't help much if earnings keep falling.

Regarding Cisco, which has $18.5 billion in cash on hand, analysts were split on whether buying back shares was such a great idea even considering the patriotic gesture.

Hasan Iman, an analyst at Thomas Weisel Partners, said Cisco's buyback "is an important signal by management that business has positive momentum," and added that the company's repurchase plan puts its "strong balance sheet to use."

Not all agree, however. Tad LaFountain, an analyst at Needham, said Cisco is reducing shares but also losing interest income on $3 billion. In other words, the buyback isn't likely to boost Cisco's earnings.

Until the tech sector stages a comeback, share repurchase programs aren't going to cause much excitement.

"In the case of no earnings, buybacks aren't necessarily a good thing," LaFountain said. "It's not a home run."