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STOCK REPURCHASES BOOST LOCAL SHARES

BUFFALO-AREA companies have been giving themselves a vote of confidence lately -- by buying back their own stock.

During the last 10 months, five Western New York companies have announced plans to purchase up to $55.9 million of their own stock, while other local firms have similar programs already in place.

And for the most part, those buybacks have paid off, particularly during the first few weeks after the program was announced.

Of the five local companies that have announced buybacks since late August of last year, only one has seen its stock go down in the following month. What's more, most of those stocks have solidly outperformed the Standard & Poor's index of 500 stocks during the first month following the announcement.

"If a company buys back its stock, it should enhance the value of its remaining shares," says John Olson, vice president of the Buffalo office of S.C. Parker & Co. Inc. "The immediate effect should be that the stock price goes up."

With the company looking to snap up its own shares, the stock is likely to go up because of the
increased buying pressure. In some cases, it also sends a signal that the company thinks its stock is a good deal, which may prompt other investors to take a look at the stock.

But if the repurchase gives the stock a short-term boost, it's long-term impact will depend on several other factors, including whether the shares are cheap or expensive at the time of the buyback and whether the program will hurt the company's financial strength.

By repurchasing its own stock, a company reduces the number of shares that are on the market. With fewer shares outstanding, that, in turn, will boost a company's earnings per share figures and, perhaps, make the stock more attractive to investors.

In addition, a company like First Empire State Corp., the parent of M&T Bank, often will buy back its own shares when it has excess equity or thinks its stock is undervalued, says Gary S. Paul, the bank's senior vice president.

In other cases, though, a company may be more concerned with self-preservation than value. That's because buybacks can be used by the current management as a defense against hostile takeovers by bringing more shares under the control of friendly hands and reducing the amount of stock available to corporate raiders on the open market.

For the most part, though, brokers say buybacks are a positive sign for a company. "I always like to have management have their money where their mouth is," says Rosemary Ligotti, vice president of the Buffalo office of Prescott Ball & Turben Inc. "They've certainly got to believe in what they're doing to buy their stock back."

That may not always be enough, though. Barra Inc., a financial consulting firm based in Berkeley, Calif., found that only 47 of the 91 companies that announced stock buybacks last year outperformed the market during the week after the plan was revealed.

Buffalo-area companies, however, have had better luck with their buyback programs. Mark IV Industries Inc., Pratt & Lambert Inc., Computer Task Group Inc. and Moog Inc. all beat the S&P 500 during the first month after their buybacks were announced.

Only First Empire State Corp. stock fell during the first month, dropping 6.3 percent at a time when the S&P was rising 1.6 percent.

Mark IV has been among the most aggressive in buying back its stock, spending nearly $30 million since April 1989 to repurchase about 3.1 million shares in two separate programs. The total number of shares has been adjusted to include a 3-for-2 stock split last November.

"We feel that Mark IV's shares are undervalued by the market," says Sal H. Alfiero, the company's chairman. The buyback "has not only been an attractive investment, but (it) demonstrates our confidence in the future of the company."

Still, a buyback alone isn't enough to make a stock worthwhile. A lot depends on why the company is buying back its shares and how the program is being carried out.

"You have to look at what the company is doing and whether it makes sense," Paul says.

For example, First Empire has been steadily buying back its shares since its merger with East New York Savings Bank. That merger left First Empire with extra equity at a time when the company's executives felt that the stock was undervalued, so they decided to buy back some of the shares.

"It's more of a long-term decision that the company has greater value than the market has perceived," Paul says.

In other cases, though, a company may turn the repurchased shares over to its pension fund. Other times, the buyback may be related to the company's Employee Stock Ownership Program.

In either case, the repurchase will not have any effect on the number of outstanding shares because the stock is not retired. As a result, the buyback is less likely to boost the price of the stock.

Buybacks also can have an impact on a company's balance sheet by reducing the firm's outstanding equity, which, in turn, can boost its debt-to-equity ratio and hurt its credit rating.

And that effect could be felt even more if the company borrows money to repurchase the shares, rather than using its own cash.

Ms. Ligotti, however, says that's not necessarily a bad thing. "Some of your best growth companies are going to have to borrow because they're plowing all their money back into the company," she says.

But Paul says the big question is just how much of a financial cushion the company will have left to pull it through hard times. "You could buy back so much that you reduce the survivability of a company in hard times . . . because the equity is a safety net," he says.

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