The three musketeers strike again: SAP co-CEOs Jennifer Morgan and Christian Klein as well as CFO Luka Mucic want to make everyone in the SAP community happy, and they want to make everyone happy all at once. To make that happen, they are moving large sums of money around – only through legal, albeit a little questionable, methods, primarily financial engineering.
How to make shareholders happy
A high dividend makes everyone richer and can have positive effects on the stock price. There’s a simple recipe to that.
The company takes out a loan, therefore accepting a small debt. This capital is used to buy back shares. The company is basically buying itself back. This money transfer reduces the number of shares available on the stock market. While the company’s value stays the same, the remaining shares are now worth more. Ideally, the stock price rises, and shareholders are happy.
Financial engineering
This wonderfully legal money transfer – a rags-to-riches story, so to speak – has a name: Financial engineering. According to Wikipedia, financial engineering is “a multidisciplinary field involving financial theory, methods of engineering, tools of mathematics and the practice of programming.”
Sounds complicated in theory, but in its press release, SAP makes it sound easy.
The press release reads, “In light of SAP’s strong financial performance and balance sheet, the Supervisory Board of SAP approved the Executive Board’s plan for enhanced capital return in 2020. Under this new program, the company is authorized to repurchase shares and/or issue a special dividend with a combined volume of €1.5 billion by December 31, 2020.”
CFO Luka Mucic is quoted with saying, “Share buybacks and special dividends, in addition to an attractive regular dividend policy, are an important element to building shareholder value and enabling our shareholders to participate in our success.”
What he didn’t mention, however, is that General Electric almost went bankrupt because of its own financial engineering ambitions. It remains to be seen if SAP will go down a similar path or if the three musketeers can steer the course towards happy shareholders in the future.
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