Even if GoPro theoretically went out and repurchased $300 million of stock right now, it would barely be offsetting the past 18 months' worth of dilution. If shares begin to recover as GoPro begins implementing the program, it will less than offset the dilution. During the past five quarters since going public, GoPro has incurred a total of $95.7 million in stock-based compensation expenses.
Don't just take my word for it. In the earnings press release announcing the repurchase program, GoPro says that, in addition to open-market purchases and block trades, the repurchases may also be made "under plans complying with both Rule 10b-18 and Rule 10b5-1." A Rule 10b5-1 plan is a way for insiders to set up pre-arranged trading schedules ahead of time in order to sell shares and avoid insider trading allegations. Quite literally, GoPro is explicitly stating that some of this money will just go to insiders -- who will undoubtedly continue receiving equity grants, anyway.
Who's the boss?
Shortly before GoPro's IPO last year, CEO and founder Nick Woodman was granted 4.5 million restricted stock units, valued at $284.5 million at the end of last year, making him the highest-paid U.S. CEO in 2014 based on the Bloomberg Pay Index. Does it make much sense that an overhyped small-cap stock that's down 70% year to date should have one of highest-paid executives in the country? (Of course, this RSU grant's value has also plunged by 70%, but you get the idea.)
None of this is to say that Woodman is not vested in growing GoPro's business. Bulls often cite his 30% stake in the company -- clearly he is quite interested in GoPro's stock price. I'm not questioning Woodman's engagement as a founder CEO either, and investors certainly shouldn't question his authority considering his control of 74% of all voting power through his super-voting Class B shares.
I just hate GoPro's corporate finance practices as they relates to equity compensation and this inappropriate share-repurchase program, because it implies that the IPO was less of a way for public investors to get in on a strong business, and more of a way to enrich insiders.
Summing it all up
Just consider this timeline: GoPro gives Woodman a massive RSU grant shortly before going public, adding to his already-substantial position. Half of the IPO proceeds go to insiders cashing out, and then GoPro does a secondary offering to allow insiders to cash out again in an orderly fashion. The company raises almost $300 million combined between both offerings.
The business hits a wall in 2015, GoPro makes some strategic mistakes (such as HERO4 Session pricing), and now the company plans to use that $300 million -- that it apparently never needed in the first place -- to offset all of the equity that it's given to insiders during the past 18 months, leaving public investors about breakeven (best case scenario) in terms of dilution, and almost assuredly sitting on unrealized losses since shares now trade below the IPO price.
If GoPro didn't need the IPO money, and is effectively transferring it to insiders via a share repurchase program, why did it go public in the first place? Do you hate this repurchase program yet?
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The article Why I Hate GoPro Inc.'s Share Repurchase Program -- and You Should, Too originally appeared on Fool.com.
Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool owns shares of and recommends GoPro. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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