HP manages an on-going share repurchase programme to offset the dilution created by shares issued under employee stock compensation plans. It also seeks to repurchase shares opportunistically when favourable market conditions exist. The company generally sets its share repurchase targets on a quarterly basis which are dependent upon shares expected to be issued and management’s view of the intrinsic value of the stock relative to market valuations.

The primary challenge of the share repurchase programme is to repurchase the desired number of shares for the lowest price or obtain the maximum amount of shares for the amount to be invested in share repurchases. There are a number of repurchase strategies that can be pursued either in the open market or through private structured transactions. The simplest methods are to buy a set share or dollar amount daily in the open-market but these don’t yield significant savings. More complex alternatives can be structured through private bank transactions often using derivatives that do offer some savings to 10b-18 Volume Weighted Average Price (VWAP) but generally require that a company give up some of its flexibility to achieve results.

“Neither of these solutions is ideal because HP prefers to maintain the flexibility to adjust the repurchase programme terms as needed but still desires to repurchase shares at a discounted level thus leading it to seek out a hybrid type solution,” says Andrew Simanek, Treasury Manager.

The solution the company ultimately opted to pursue was a hybrid alternative – a grid structure embedded in an open market transaction – that enables it to simultaneously repurchase stock at a lower price than traditional open market strategies of daily share/dollar targets (dollar cost averaging) and maintain control over valuable repurchase terms that are often necessary to yield in order to achieve a discounted purchase price in private structured agreements. This solution has yielded significant cost savings to the company.

The grid structure can be highly customised and works on the basic premise of varying daily repurchase targets with real-time movements in the stock price or other associated metrics. Grid thresholds can be designed and set using fundamental analysis, market technicals, or any other method desired. The treasury usually sets grid thresholds on a quarterly basis with its review of the overall goals of the share repurchase programme.

The review includes DCF analysis, multiples, and other valuation techniques to determine the attractiveness of the stock at various price levels. Grid thresholds are then set to repurchase a target amount of stock at various levels. The programme is monitored throughout the quarter and adjustments can be made to alter repurchase levels if necessary. When using price levels as the grid thresholds, tighter variability leads to better VWAP performance without making execution unnecessarily cumbersome. In fiscal year 2010, this solution saved HP over $393m over the 10b-18 VWAP benchmark and over $251m over the dollar cost averaging methodology.

“The grid structure enables HP to repurchase shares throughout the year on the open market at an average price that is significantly below both the simple average 10b-18 VWAP benchmark and the dollar cost averaging method. This translates into a substantial cost savings for the share repurchase programme and provides a higher return on investment to the company for shares repurchased,” says Andrew.

“The grid structure can be utilised within 10b-18 and 10b5-1 open-market repurchase transactions eliminating the need to structure more complex private arrangements. HP maintains complete flexibility of valuable repurchase terms that must often be yielded in structured discount to 10b-18 VWAP products. The grids are highly customisable, easy to implement, and can be based on an endless array of analytics.”