CFOs at both Forrester and Gartner are engaging in fascinating share buy-back strategies. In both cases the strategies are constrained by complex shareholder relationships. They are hard to understand. However, we disagree with those who say that these strategies are of no importance to AR professionals. Hard thinking may be uncomfortable, however, it is also a source of advantage.
In both cases, these firms are transferring profits to shareholders. They do not favor dividends: they are costly to administer, often unfavorable for tax purposes and often symbolize that the firm intends to pay regular dividends rather than organically grow their businesses. It is often assumed that growth companies do not pay dividends. Instead, Gartner and Forrester prefer to buy back shares. The working of supply and demand should conspire to drive up the share prices accordingly. Often, firms buying back shares destroy them.
In Gartner’s case, the picture is more complex. Its largest shareholder is reducing its share in the firm from around a third to around a quarter. Gartner is creating some new shares, partly in order to raise new funds to buy back only the shares of that shareholder: Silver Lake Partners. Such a reduction in the holding of the firm’s largest shareholder is massively important. It is a solid judgment that the risk of owning such a large holding now outweighs the future gains expected by Silver Lake. The buy-back will sweeten the deal for some shareholders, and disorient some of them into thinking that the value of the firm has risen in line with the stock price. That will not be the case, in that instance.
Forrester’s buy-back strategy also interests us. It is more than half way though a $50 m buy-back scheme which aims to drive up the firm’s earnings per share. In itself, this is pointless and serves only to fool those look at EPS rather than overall profit. However, it does allow Forrester to disburse some of the huge cash pile is has earned.
Perhaps a cultural difference is at work here; Lighthouse’s team in Europe often feel that US firms are proud of holding large positive cash balances, and that they feel they defend the company against take-overs. That baffles us. The rise of leveraged buy outs showed that strong cash balances can be borrowed against by hostile acquirers. They are in no way a strategy to defend against purchase.
In fact, another explanation could be that Forrester is careful about investing its cash. There have been a number of good acquisition possibilities for Forrester. Most are in the $5 m to $50 m range that most suits it. However, Forrester’s executives are able to find problems with the price, profitability or people available in prospective purchases. We don’t accept this as a good excuse. Forrester should be looking for firms that it can make perform better. It won’t get any profitable growth from assets that are already valued highly.
Forrester can, and we think should, turn around some weaker analyst firms. It has shown that it has improved its own margins since its merger with Giga Information Group. The enrichment rate is also up, and accounts receivable are okay: this is a effective set of steps to boost the performance of almost any analyst business.
There’s a lot more we could say about the performance of both Forrester and Gartner. In a nutshell — these are now well run businesses. Both Gartner and Forrester have been looking at some interesting businesses, particularly in data, events and consulting, and especially in Europe and Asia. Perhaps its is also a little cautious to not look in their domestic market, or to seriously consider broadening their portfolios with a synergistic purchase.
For the moment, they seem happier taking the easier route: buying shares back from shareholders. However, we think they are pouring away capital which could be invested in other opportunities. The second layer of analyst firms now have those opportunities instead.