Could Demand Media Share Buyback Program Help With Employee Retention? | DomainInvesting.com

Could Demand Media Share Buyback Program Help With Employee Retention?

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One of the best methods a private company can use to hire and retain good companies is to offer stock incentives. When the company later goes public, the employees are typically rewarded for their efforts. This gives people incentive to work for the company and stay working even in difficult times.

Last week, Demand Media stock (DMD)  hit a low price of $7.12/share. This morning, the company announced a $25 million share repurchase program. In announcing the news, company CEO Richard Rosenblatt stated, “This share repurchase program reflects confidence in our business and our commitment to maximize shareholder value.”

This is how the company explained the program in the press release:

Under the program, Demand Media is authorized to repurchase up to $25 million of its outstanding shares from time to time on the open market or in negotiated transactions. The timing and amounts of any purchases will be based on share price, market conditions and other factors. The program does not require the Company to purchase any specific number of shares and may be suspended or discontinued at management’s discretion at any time without prior notice.

The part about “in negotiated transactions” makes me wonder if this will allow the company to purchase shares directly from employees who own company stock.

One might imagine employees are nervous about the precipitous decline in stock price since the company went public and managed to reach a price of $27.38/share just a few months prior. By repurchasing shares from employees, the company could allay some of their fears and reward them for their hard work over the past months and years.

I am certainly not the most knowledgable about this type of thing, but if I were a DMD employee with stock, I would be nervous about the value of my stock, especially given the state of the economy. If you aren’t aware, Demand Media owns domain registrar Enom as well as NameJet.


About The Author: Elliot Silver is an Internet entrepreneur and publisher of DomainInvesting.com. Elliot is also the founder and President of Top Notch Domains, LLC, a company that has sold seven figures worth of domain names in the last five years. Please read the DomainInvesting.com Terms of Use page for additional information about the publisher, website comment policy, disclosures, and conflicts of interest.


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Comments (10)

    jp

    I’m certainly also no knowledgeable on this but I reckon they raised a bunch of cash going public and now are buying their company back at a discount. More power to them if they can pull it off.

    August 22nd, 2011 at 9:54 am

    Elliot Silver

    Stock is up over 10% this morning.

    August 22nd, 2011 at 10:46 am

    JNet

    IMO the share buyback was a desperation move to help halt the fee fall of the DMD shares..moreso than management expressing confidence in the biz…. but that doesn’t neccessarily mean management (at leat some) doesn’t have confidence in the biz, whether it be warranted or not.

    I think most long term investors (not the short term traders & flippers) who bought IPO shares (who haven’t bailed out yet) wanted the IPO funding proceeds to propel the companies profits & growth…not to be spent as “bandaid” or life jacket on the sliding shares. …. Most buybacks happen with more marure companies who are not nearly as “fresh” off of their IPO launch…..Although, I must admitt, the move apparently worked a bit today on putting the brakes on the stock’s speedy move south.

    As for the notion of using the buyback money allotment to purchase shares from employees (if it is legal)… Most IPO investors & longterm shareholders (again,, who haven’t bailed out already) don’t want their investment dollar lining the pockets of employees at this juncture so close after the IPO…. but only on a reward/performance basis that is evidenced in impressive income statements….Performance/Incentive based packages shoud be more of the focus for a company at this stage…

    and I do know that some employees are really working hard … Top or new management needs to navigate the ship differently.

    Bottom Line —> The share buyback does not propel or improve the company’s operations, biz model and income statement…which is paramount to “bonafide” meaningful stock appreciation.. a better playbook with effective execution does !

    August 22nd, 2011 at 11:32 am

    Mike

    This is boiler plate material. Most companies never actually buy back any shares. It’s used to prop up the share price when things start spiraling out of control. The bigger issue for employees is that most of their options are now worthless. If they issued deep in the money calls at a $10 strike when the stock was $27, they were worth at least $1,700 each. Now they are out of the money and worth maybe $75 depending of the timeframe. That’s not good for moral.

    August 22nd, 2011 at 11:33 am

    Rhead

    I’m sorry but this is just a backdoor put for Richard Rosenblatt and his cronies, rammed through the board, because they’re all going to take advantage of it.

    The insider lock-up just ended less than a month ago. No insiders have been able to sell shares on the open market yet, except those who were in on the IPO.

    That is all this is.

    August 22nd, 2011 at 1:29 pm

    Snoopy

    $25 million won’t hold up the share price for any length of time. They are potentially making their situation worse by eating up cash on buying back stock, it is not like they have excess cash and the ability to raise further funds would be greatly diminished now. They are potentially buying back $8 stock that might be worth $5 in 6 months time.

    “This share repurchase program reflects confidence in our business and our commitment to maximize shareholder value.”

    Translation,

    “We are desperate to try and prop up the share price and will do anything we can which might help except delivering profits”.

    August 22nd, 2011 at 7:05 pm

    JNet

    @ Snoopy … Spot On … you really get It.

    @ Rhead … Man-o-Man…. If shares of management or board members are found to be “scooped up” in that share buyback program.. The crapola is really gonna hit the fan in large quantites

    August 22nd, 2011 at 7:41 pm

    miguel sanchez

    The negotiated transactions for share repurchase typically refer to contracts with investment banks to buy shares at a specific price or range of price (collars).

    August 23rd, 2011 at 12:00 am

    Rhead

    I have added a blog entry about this, explaining my thinking in more depth. They won’t flagrantly buy back insider shares, but in addition to talking up the market (as others mentioned) there is now a mental put underneath the market for insiders. They will be net sellers into that buyback, guaranteed. The biggest shareholders benefit the most. That is axiomatic. Similarly, when they re-strike insider options to a lower price, that will also benefit the insiders with the most option grants. There is nothing new at this game.

    August 23rd, 2011 at 8:40 am

    Meyer

    Here is an expert’s opinion about buybacks.
    It was discussed yesterday. It is approx. 5 min.

    http://video.cnbc.com/gallery/?video=3000040794

    August 23rd, 2011 at 1:31 pm

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