Not too long ago I bristled when I overheard a colleague tell a salesperson that it’s never a good sign when a company buys back their own stock. Upon reflection, I was more likely stuck on the use of the word “never” (a trigger word that “always” gets to me) than the negative ramifications of buybacks. In addition, after several months of doing business alignment reviews, I’ve observed company after company report in their 10-Ks that they are taking a substantive portion of the US corporate tax gain as fuel for share repurchases. Needless to say, I’ve come around to my colleague’s point of view.
Have these corporations lost their collective vision for strategic growth initiatives and innovation? Or are we, the enterprise sales community, failing to develop compelling business cases that point to technology ROI and long-term shareholder value that justifies such investments?
Let’s take a quick look at stock buybacks. On the surface, the transaction is simple. Companies repurchase outstanding shares and either retire them or redistribute them to employees (especially executive management) as an incentive. Stock price, earnings per share and other such metrics are improved (by reducing the denominator in those ratios), which increases shareholder value. But the math isn’t pure as it takes assets (cash) or debt (a loan) to buy the stock, so shareholder equity is reduced along the way. (Investopedia describes the fundamentals of stock buybacks and some negative buyback scenarios if you want to learn more.)
A big criticism of buybacks is that the company lacks the strategic initiative to invest in growth. As a counterpoint, this HBR article makes the case for share repurchases. And Apple, who earlier this year announced intentions to repurchase $100B (yes, that is a ‘B’ for billion) of its own stock, may be the poster child for “virtuous” buybacks having averaged $33B in buybacks over the last five fiscal years. Still, the timing of increased buybacks and dividends on the heels of a huge corporate tax reduction is noteworthy (even following Apple’s announcement that it will add $350B to the US economy).
So Just What Are Companies Doing With the Corporate Tax Benefit?
Research indicates that more than half of the tax savings will go to shareholders in the form of buybacks, dividends and retained earnings. In fact a review of a recent Goldman Sachs report indicates that buybacks have surpassed capital investment for the first time in a decade. Buybacks have grown roughly 50% to $384B in the first half of 2018 and are expected to exceed $1T by the end of the year (yup, that was a ‘T’ for trillion). The silver lining, however, is that capital spending is up 19% ($341B in the first half of 2018) and is showing the highest growth rate in a quarter of a century. (Not worthy of note is the lower than “promised” investment in employees.)
So, buybacks aside, let’s seize this opportunity—an annuity of increased net income for U.S. corporations. Let’s roll up our collective sleeves to create a compelling business case for leveraging the proposed technology to grow revenues, reduce cost and/or increase employee productivity. Let’s further grow the capital investment pie and get our fair share!
So What Makes an Enterprise Technology Investment Business Case Compelling?
One could write a book (or at least a white paper) on calculating ROI for technology investments, but at least consider the following:
- What are the corporation’s key strategic growth initiatives and how does your proposed enterprise technology solution align to them and enable success?
- Measure the current state and project a future state enabled by your technology. What five to seven discrete benefits can you credibly and transparently quantify (in collaboration with the prospect) to demonstrate the overwhelming ROI of this transformation?
- How will you partner with the company to ensure a sound deployment and accelerated adoption of the technology? This is critical to reducing perceived risk of change and shortening payback (key to short term shareholder value).
- Do you have prior success in deploying a similar solution that you can reference to further reduce such risk perception?
- Lastly, do you know what profit metric matters most to your target company—EBITDA, ROA, EPS—and did you translate your technology ROI analysis into that key metric?
When enterprise sales teams frame their business cases in a way that answers these questions, we stand a much better chance of getting C-suite attention and our fair share of this corporate tax windfall!
As always, you can contact TFP to work with you on business alignment messaging, business case analysis and enterprise deal structuring.