Share repurchases by companies listed on the JSE: the effect on market capitalisation by ProQuest


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     Share repurchases by companies
     listed on the jSE:
                                                the effect on market capitalisation

     T   he fact that South African companies have been allowed
         to repurchase their own shares as from 1 July 1999, has
     created new challenges for financial analysts as well as company
                                                                                The use of the number of group shares for EPS and HEPS
                                                                                purposes, leads to a larger ratio (EPS and HEPS) than would have
                                                                                been the case if the number of company shares were used as
     accountants and auditors. For the financial analysts, it has               the denominator, and would therefore be the preferred number
     introduced an additional complexity during the evaluation of               of shares to be used by the company accountant. This is also in
     company financial performance. The accuracy of these valuations            line with the relevant accounting requirements (SAICA, 2007:IAS
     is dependent on the manner in which repurchase activities are              33; SAICA, 2007:CC 07/02). However, when calculating market
     reported (in annual reports as well as by the JSE). Although nine          capitalisation and net asset value, the opposite prevails: the
     years have passed since the inception of share repurchases by              use of the number of company shares leads to a larger market
     South African companies, it appears that inconsistent reporting on         capitalisation and net asset value and could therefore be the
     these activities (in annual reports as well as by the JSE) has led         preferred number of shares to be used by the company accountant.
     to the overstatement of the market capitalisation by companies             There is no accounting standard (or circular or interpretation)
     participating in share repurchase activities (Bester, Hamman,              prescribing the number of shares to be used when calculating
     Brummer, Wesson and Steyn-Bruwer, 2008).                                   the market capitalisation, and net asset value per share and the
                                                                                calculation thereof is therefore at the discretion of the company
     The Companies Amendment Act of 1999 allows companies to                    accountant. Market capitalisation is a reflection of a company’s
14   acquire their own shares and also allows subsidiaries to acquire           size and many stock market indexes, such as the JSE Top 40 and
     shares in their holding company (up to a maximum of 10% of                 other market capitalisation based indexes, are compiled on a basis
     the issued shares of the holding company). The own shares                  of market capitalisation. There might therefore be an incentive
     repurchased by the company are cancelled from issued share                 to state a high market capitalisation in order to qualify for more
     capital (and re-instated as authorised share capital), whereas             prestigious indexes.
     shares purchased by a subsidiary are not cancelled but are treated
     as treasury shares (therefore deducted from share capital in the           Which number of shares (company or group) is used in practice
     consolidated financial statements) (RSA, 1999). When shares                when calculating market capitalisation? A database compiled
     are purchased by subsidiaries, the number of shares used in the            by the Graduate School of Business of the University of
     calculation of financial ratios is different for the company and the       Stellenbosch (USB) was used to ascertain on which number of
     group. For example, if a company has an issued number of shares            shares companies (in their annual reports) and the JSE base their
     of 100 and repurchases 8 of its own shares, while its subsidiary           market capitalisation calculations. The sectors covered by the
     purchases 5 of the shares, the number of company shares is 92,             USB database exclude Mining, Financials, Development Capital
     while the number of group shares is 87. Share trusts (through              and Alternative Exchange. Although this database covers all
     which many employee share option schemes are conducted) need               repurchases from 1999 to 2007, only data for the most complete
     to be consolidated (SAICA, 2007: SIC-12), and therefore also need          recent calendar year (2006) for which all published annual reports
     to be deducted (and represent treasury shares) when calculating            are available, were used. The complete database of companies
     the number of group shares. The difference between the number              involved in share repurchase activities for the period 1999 to
     of shares of the company and the number of group shares may                2006 contained 127 companies (excluding companies delisted or
     be material: in Network Healthcare Holdings and Group Five, the            suspended before they published a 2006 annual report). Of these
     difference amounted to 50% and 35% (relative to the number of              127 companies, only 62 chose to publish market capitalisa
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