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Dell stock plan backfires
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June 19, 2001: 8:18 a.m. ET
PC maker buying back shares at $47, almost twice the market price
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NEW YORK (CNNfn) - Dell Computer Corp. is repurchasing some of its stock at $47 a share, almost twice the current trading price of $24, after an employee-compensation plan backfired, according to a published report Tuesday.
The expensive commitment by the personal computer maker to buy back its shares was made to minimize the cost of granting stock options to employees, Wall Street Journal said.
The Austin, Texas-based company has paid a premium of about $750 million above its market price over the past four quarters to buy back shares from financial institutions, the report said, citing Dell's most recent financial statements.
Under the repurchase plan, Dell sold puts, or contracts to buy its shares at specified prices, receiving about 75 cents for each put, the paper said, using the proceeds to offset the cost to issue shares.
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As long as Dell's stock price was above the put exercise price, the puts were worthless when they expired. But a slump in PC stocks beginning last fall is producing big losses on Dell's repurchase plan, the report noted, with the company's stock dipping as much as $22 a share below the puts' exercise price.
A Dell spokesman told the Journal the puts have been part of a stock-buyback plan under which the PC maker so far has repurchased 887 million shares at an average of less than $9 a share. "These puts have minimized the expense of the program overall," the spokesman told the paper. He also said Dell would be willing to dip into its cash reserves of $5.27 billion to repurchase the shares.
According to the latest Securities and Exchange Commission filings, the paper noted that Dell has written put contracts on 96 million shares at an average price of $44 a share, representing a liability of $4.22 billion.
In addition to Dell, Microsoft Corp. also has been making similar premium-priced purchases, the Journal said.
Shares of Dell (DELL: Research, Estimates) fell 40 cents to close at $23.92 Monday. 
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