When a company's management itself sells off a large proportion of its shares, the price expectedly falls as broader markets see the transaction as a lot of faith in the company's future prospects. The corollary is also true. When a company embarks on a major share buyback programme, the stock rises dramatically, boosting investor returns.
After ending a nine-year loveless marriage with Chrysler, Daimler AG, the world's second-largest luxury car manufacturer and the largest German company by revenue, has announced plans to resume share buybacks after a temporary pause, outlining plans to spend up to 6 billion ($9.31 billion) to repurchase 96.4 million shares or 10 per cent of its stock by 8 April 2009.
Shares bought back by that date, perhaps via derivatives as well, will be cancelled or used for stock option plans, a company statement said on Tuesday.
Under pressure to boost investor returns, Daimler had bought back shares valued at 6.2 billion between August and March. Daimler got approval for a further buyback in April, but didn't act until today, contributing to a 31 per cent drop in the stock this year.
"Daimler's capital structure is to be further optimised with the goal of reducing the use of equity capital, which is more expensive than debt capital. This will avoid investment decisions being limited by excessively high capital costs," the statement said.
Post announcement, Daimler stock rose the most in more than four months in Frankfurt trading, by as much as 2.26, or 5.2 per cent, to 45.94. This valued the company's market capitalization at about 44 billion. Tellingly, the shares had traded at around 78 last October, just after it broke off from Chrysler and renamed itself Daimler from DaimlerChrysler.
Daimler said early this month that earnings this year will rise as car and truck sales increase. Earnings before interest and taxes will be ''well above the prior-year level,'' excluding the effects of selling the Chrysler unit last year.
Profit fell 32 per cent in the first quarter to 1.33 billion, dragged down by Daimler's remaining 19.9 per cent stake in Chrysler and lower truck sales. Continued poor performance of its flagship truck division has negated better-than-expected luxury division performance.
DaimlerChrysler was founded in 1998 when Daimler-Benz merged with the US-based Chrysler Corporation. The deal created a new entity, DaimlerChrysler.
Chrysler reported losses of $1.5 billion in 2006. It then announced plans to lay off 13,000 employees in mid-February 2007 close a major assembly plant and reduce production at other plants in order to restore profitability by 2008.
The merger was contentious with investors launching lawsuits over whether the transaction was the 'merger of equals' that senior management claimed or actually amounted to a Daimler-Benz takeover of Chrysler.
A class action investor lawsuit was settled in August 2003 for $300 million while a suit by billionaire investor activist Kirk Kerkorian was dismissed on 7 April 2005. The transaction claimed the job of its architect, chairman Jόrgen E Schrempp, who resigned at the end of 2005 in response to the fall of the company's share price following the transaction.
During this period, Daimler lost its erstwhile top position in luxury-vehicle sales to German rival Bayerische Motoren Werke AG (BMW), and continues to be in second position. However, it is the largest truck maker in the world.
Daimler CEO Dieter Zetsche sold Chrysler to Cerberus Capital Management LP in August 2007 after its takeover had led to a $12.6 billion reduction in Daimler's market value. In October 2007, the company was rechristened Daimler AG. The company reported annual revenue of 99.4 billion last year.