Financial Instruments and Markets: A Casebook

17

Dell Computer Corporation: Share Repurchase Program

Carolyn Evans, a research analyst at LV Technology Fund, looked up from Dell Computer's fiscal 1996 annual report to ponder some news contained therein. Dell Computer, a company in which the fund held a small investment, had recently (February 16, 1996) announced financial results for its fourth quarter, 1996 (quarter ending January 28, 1996). As part of this announcement, Dell had revealed that its board of directors had authorized a stock repurchase program for up to 12 million shares. The announcement also stated that Dell might use equity options as part of the repurchase program.

This statement brought back memories of 1993, Carolyn's first year with the fund. At that time Dell, under attack by securities analysts for its use of foreign exchange options for speculation, had seen its stock price plunge from $49 per share to $16. Now, on March 29, 1996, Carolyn got a glimpse of the types of option transactions that Dell was undertaking. According to the annual report, by late March 1996, Dell had already written 2.8 million put options and bought a similar number of call options on its own stock. Carolyn was trying to understand why Dell was using options and what effect they might have on Dell's stock price.

BACKGROUND

Dell Computer was founded in Austin, Texas in 1984. Initially, Dell was a computer components business, buying excess inventory at cost from IBM dealers and reselling this excess through newspapers and magazines ...