Share Repurchase: Is it good or bad?

Financial Strategy (BMBA715.2) Date: 27th March 2013 Tutor: Mark Pilkington Author: Nandkumar Mahajan (136866461) Word Count: 3069

Table of Contents Executive Summary ............................................................................................................................. 3 Company capital structure & Shareholder value ...................................................................... 4 Why companies really repurchase shares? ................................................................................ 6 Is there any real value in share repurchase? ............................................................................. 7 Hewlett-­‐Packard (HPQ) ................................................................................................................................ 7 Next Plc. (NXT) ........................................................................................................................................... 10 Conclusion ............................................................................................................................................ 12 References ............................................................................................................................................ 13 Books ......................................................................................................................................................... 13 Journals ...................................................................................................................................................... 13 Websites .................................................................................................................................................... 13 Articles ....................................................................................................................................................... 13 Appendix ............................................................................................................................................... 15 HP Financial Details ................................................................................................................................... 15 Next Financial Details ................................................................................................................................ 16

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Executive Summary Since the early 1980s, the use of share repurchase by U.S. firms has grown considerably. Between 1980 and 1998, share repurchases rose from $1.4 billion to $220 billion annually, accounting for more than 50% of the cash distributed by publicly traded U.S. firms in 19981. In 2005, the global volume of share repurchase programmes was estimated at approximately US$400 billion (Vermaelen, 2006). In the UK, where share repurchase programmes were legalised in 1981, activity grew extensively and by 2006, it is estimated that British companies spent a record £46 billion on buying back their shares compared with the annual spend of £10 billion during the late 1990s. This report tries to analyse the decisions taken in financing company activities, which determine the firm’s capital structure and required return in case of equity versus debt financing. The first part of the report tries to go through various theories, which define the optimal capital structure and its impact on company’s performance. Also, there is a theoretical explanation for increasing the business value to maximise the equity shareholder’s wealth. The report discusses the various options available for firms to return the profit in terms of dividends and share repurchase. It tries to compare the pros and cons of distributing dividends versus repurchase of shares to increase shareholder value. The main objective of this report is to try to understand various motives behind share repurchase programmes and its impact on all stakeholders and ultimate business value. This has ben analysed by going through theories, various common actions by company’s management and its impact on share price, company’s capital structure, market perception of company’s performance and overall impact of the share repurchase on business value. Above has been analysed with share repurchase programmes undertaken by Hewllet-­‐Packard (HPQ) & Next (NXT), to demonstrate share repurchasing needs to be used wisely to increase the business value as well as to maximise the shareholder wealth. If timing of share repurchase is wrong and if company’s future vision is unclear then it certainly impacts overall business value, which we have seen in case of Hewllet-­‐Packard, whereas Next has increased shareholder returns by wise share repurchase programmes by balancing financial outlay to return the real profit through share repurchase instead of piling the huge debt. In conclusion this report tries to demonstrate the case of share repurchase as a tool which can be used effectively to increase the business value, however if management does not focus on real business growth and tries to use share repurchase programme to influence market then it can turn out to be real disaster.

1 Gustavo Grullon & David L. Ikenberry, What Do We Know About Stock Repurchases?, 13 J. Applied Corp. Fin. 31, 33 (2000); Scott Weisbenner, Corporate Share Repurchases in the 1990’s: What Role Do Stock Options Play? 1 (Fed. Reserve Sys., Fin. & Econ. Discussion Series Paper No. 2000-­‐29, Apr. 2000).

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Company capital structure & Shareholder value In corporate operations, normally finance manager has to make three major decisions: the investment or capital budgeting, how to finance investments and the third decision about what to do with profit.

Firms can finance the investments & business growth by either issuing equity as company share or it can borrow money. In reality firms have a balanced mix of issued equity and debt and then managers have to balance the act of repaying the debt with interest and providing certain returns to shareholders. Debt repayment is a priority liability, which has to be repaid at agreed terms & timelines, irrespective of business performance, whereas shareholder returns depend on the level of profits. This is the reason normally cost of equity is expensive than cost of debt, as shareholders take bigger risk of uncertainty and expect the higher returns. So in theory, companies with higher gearing ratio are seen as high risk and for such companies expected return on equities is higher. So firms normally balance the debt-­‐equity ratio to devise an optimal cost of capital for investment financing. In 1961, Merton Miller and Franco Modigliani demonstrated that, in a perfect world, a firm’s capital structure policy was irrelevant in determining how it should fund its investment decisions. Capital structure irrelevance theory2 put forward by Modigliani & Miller states that under a certain market price process, in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the cost of capital is unaffected by how that firm is financed. It does not matter if issuing stock or selling debt raises the firm’s capital. Next decision for firms would be what to do with profits. In theory firm should retain profits and reinvest in business to increase business value and shareholder returns but sometimes there are very few opportunities for investment in business, so it is wiser to distribute some part of profit to shareholders, termed as dividends, to allow them to invest in better opportunity. In taking any course of action, managers should concentrate on how to maximise the wealth of shareholders for whom the firm is being managed. Managers must not only consider the question of how much of the company’s earnings are needed for investment, but also take into consideration the possible effect of their decisions on share prices (Bishop et al., 2000)3 Here are some reasons companies pay out dividends: • Referred as a clientele effect, certain section of shareholders expects high dividends, as their main source of income as well as tax-­‐exempt institutes like pension funds, charities prefer regular dividends. Managers, who are referred as an agent in agency theory, may not always act in the best interest of owners, so insisting regular dividends allows owners to gain control over use of their money. In case managers need funds for investment then they can ask. Dividend is also seen as a conveyor of information for the company. Regular dividend is signalled as a healthy state of companies operations and financial position.

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2 Dividend Policy, Growth and the Valuation of Shares, Journal of Business, October 1961, 411-­‐433

3 Corporate Finance, 2000, Bishop, Steven R., Harvey R. Crapp, Robert W. Faff, and Garry J. Twite

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In reality cash dividends are normally subject to tax, which in turn can reduce an ultimate payout to shareholder and erode the returns. Dividend Irrelevance Theory4 put forward by Modigliani & Miller also demonstrated that in a perfect world, firm’s dividend policy was irrelevant in determining its value. Rather, a firm’s value depended upon it making optimal investment decisions. They reasoned that dividends did not matter because they could be easily offset (or augmented by) share issuance (or repurchases). However, in an imperfect world where dividends are taxed more highly than capital gains, they reasoned that firms should avoid paying dividends in favour of making share repurchases. However, total payout, as distinct from just dividends, does matter. Implicit in Modigliani & Miller’s argument that the investment policy of a firm determines its value is that any portion of earnings not needed for investment, to achieve a certain required rate of return, should be returned to shareholders. Theory says that this ideal payout is determined by the formula:

������������������������������������ = (������������������ − ������) ������������������ Or ������ = ������ − ������������������������������������ ∗ ������������������

4 Dividend Policy, Growth and the Valuation of Shares, Journal of Business, October 1961, 411-­‐433

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Why companies really repurchase shares? Share repurchase offers an alternative to dividend payments as a means of returning funds to investors. Apart from shareholder wealth maximization, there are many reasons for which managers of companies undertake the share repurchase programmes. • Market Signalling/Undervalued Shares: The signalling approach is motivated by asymmetric information between the market and a firm’s managers. When the firm is undervalued, mangers can chose to repurchase firms own shares, in the expectation that share prices will adjust immediately after this signal to the less informed market participants. The signalling motive has emerged as one of the most important explanations for share repurchases (Vermaelen, 1986)5. Ikenberry et al. (1995) show that the market ignores the first signal through the announcement of a repurchase program, but that after the repurchase, the share price continues to rise significantly, implying that the managers buy shares at a bargain price. Flexibility: Consistent payout is normally perceived as a stable performance, so in case if in a particular year there is excess profit then in that case instead of increasing normal dividend, managers prefer to do share repurchase to distribute the cash indirectly, which allows management to keep the consistent dividend in subsequent years. Taxation: Share repurchase can be a more tax efficient way to return wealth to investors, as dividends are normally taxed at normal tax rates whereas gains from sales of shares is subject to capital gains tax, which is normally considerably low. Capital Structure Alteration: Share repurchase programme can help companies balance their capital structure in favour of debt. A business may increase its level of gearing in order to achieve an optimal financial structure, which because of the tax shield effects can help company to lower the cost of capital. Share Consolidation: Share repurchase can be used as a way to reduce number of shares in market, so to increase the share price in open market. This normally helps management to protect company from takeover threats.

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There are some non-­‐value reasons for which also managers can undertake share repurchase initiatives. Sometimes this kind of share repurchase is undertaken in the interest of management benefits. • Increasing Earnings Per Share (EPS): If company repurchases shares and makes it void the total number of shares in market reduces, which in turn increase the earning per share number. This does not help to increase the business value but sometime can be used by managers to present better EPS without increasing business value. Management Share Options: Management share option schemes are normally used to tie in management fortune with companies’ performance. Generally after dividend payout share price decreases to discount the dividend payout values. Managers therefore have an incentive to employ share repurchase rather than dividend payments, as they can increase the value of their options.

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Market Underreaction to Open Market Share Repurchases, Theo Vermaelen, David Ikenberry, Josef Lakonishok (http://www.nber.org/papers/w4965)

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Is there any real value in share repurchase? Buying back shares can be a sensible way for companies to use extra cash. But in many cases, it's just a ploy to boost earnings ratios and, even worse, a signal that the company has run out of good ideas. Here are two contrasting examples of HP & Next where we can demonstrate how share repurchase an impact firms.

Hewlett-­‐Packard (HPQ) Since 2006/2007 Hewlett-­‐Packard (HP) has undertaken a large share repurchase programme, it has spent more than $50 billion in repurchasing shares from the market. Initially this programme was undertaken to change the capital structure of company, HP had a large equity base and considerably small debt, so it decided to change the capital structure to take advantage of cheap money available at lower interest rates, which management thought would reduce shareholder equity and allow company Debt-­‐Equity RaKo (Data: HP Annual Reports) to lower it cost of capital. At the time of start of this share repurchase programme, HP was driving high on the strong PC demand, generating exceptional revenues and profits. Management had a clear faith in business model and did not see any major change in consumer demand. HP management also engaged in large acquisitions like Compaq & recent Autonomy, which looked logical at the time but certainly have been failure and eroded HPs market value.

60000 40000 20000 0 2008 2009 2010 2011 2012 Total Debt (Million$) Total Equity (Million$) Debt-­‐equity rano 1.50 1.00 0.50 0.00

Management also did not foresee the future change in personal computing model, which was clearly driven by smartphone and tablets. The combined effect of increased debt and lack of future business strategy from management clearly spooked market, which resulted in gradual decline of HP share price.

Stock Performance Graph & CumulaKve Total Return (Data: HP Annual Reports)

120 100 80 60 40 20 0 2007 2008 2009 2010 2011 2012 HP S&P 100 S&P Informanon Technology

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Considering HP’s current share price, which is around $20, HP has lost more than $24 billion in shares it has repurchased since 2006. This is clearly a wrong decision from current shareholder point of view, as management has clearly eroded the business value in share repurchase.

HP Share Repurchase ValuaKon (Source: HP Annual Reports) 14000 12000 10000 8000 6000 4000 2000 0 -­‐2000 -­‐4000 -­‐6000 -­‐8000 Repurchase Value (Million$) Today' Value @$20.98 (Million$) Average Share Price Repurchase Value with Next Year Price Total Gain/Loss at Today's Price (Million$) 2006 2007 2008 2009 2010 2011 2012 50.00 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00

Over the period of last 5 years, HP has reduced it’s equity, which should have increased the value for rest of the equity shareholders, however due to company’s bad decisions like share repurchase at higher valuation, bad acquisitions, illogical write-­‐offs, HPs market cap has reduced, which has clearly reflected in its EPS & P/E ratio. In reality HP has became more vulnerable for hostile takeover.

Total No. of Shares & Market Cap (Data: HP Annual Reports) 120000 100000 80000 60000 40000 20000 0 2008 2009 2010 2011 2012 Market Cap Weighted Average Shares (Millions) 3000 2500 2000 1500 1000 500 0 2000 1000 0 3000

(Data: HP Annual Reports) 20.00 10.00 0.00 -­‐10.00 2008 2009 2010 2011 2012 Weighted Average Shares (Millions) Diluted EPS P/E Rano

EPS & P/E RaKo

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As an effect of sustained issuance of debt over the long period HP has to spend more money in serving the accumulated debt & its interest. Due to the lack of clear business strategy and bad acquisitions, HP has found itself in a situation where its operating income has not increased and in current year it has been negative due to a big write offs of past acquisitions. This has clearly reflected in in HP’s credit ratings, whereby S&P has downgraded HP’s short tem & long terms debts, which will make company very expensive to issue new debt. Year Debt Issued (Million$) S&P Credit Rating (Short Term) S&P Credit Rating (Long term) 2008 3,121 A-­‐1 A 2009 6,800 A-­‐1 A 2010 3,156 A-­‐1 A 2011 11,942 A-­‐1 A 2012 5,154 A-­‐2 BBB

OperaKng Income v/s Interest Expenses 15000 10000 5000 0 -­‐5000 -­‐10000 -­‐15000 Operanng Income (Million$) Interest Expense (Million$) 2007 2008 2009 2010 2011 2012 -­‐500 -­‐1000 1000 500 0

In summary, HP has increased its Debt-­‐Equity ratio drastically by repurchasing shares from market at higher price and issuing new debt to finance share repurchase activities. It also lacked the business strategy in terms of future growth and had to suffer due to bad acquisitions like Compaq & Autonomy. In recent years HP has written off major part of these bad investments, which has clearly reflected in its market performance. Based on the analysis seen so far, HP has majorly relied on debt t finance share repurchase, which has clearly changed its gearing ratio drastically and reflected in investor confidence and its market cap. HP still generates enough revenue and has considerable cash flow, but it certainly needs to find its way out of the increased debt consequences.

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Next Plc. (NXT) Now looking at next share repurchase programme and looking at the following analysis it seems to be quite successful in their share repurchase initiative. Next has been consistently generating consistent revenues * profits, noticeably it has done relatively well in economic turmoil of 2008/9.

Revenue vs Profit A\er Taxes (Source: Next Annual Reports) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2005 2006 2007 2008 2009 2010 2011 2012 Profit aser tax * (Million£) Revenue * (Million£) 450 400 350 300 250 200 150 100 50 0

Based on the business confidence and profits, Next management decided to undertake the share repurchase programme to redistribute the profits as well as to lower the company equity. Looking at the following graph of issued debt over the period of time, it is clear that Next management has mostly used its reserves and profits for major part of its share repurchase. Also, it has been consistently serving its long-­‐term debts using the generated profits.

Share Repurchase vs Net Debt Increase 600.000 500.000 400.000 300.000 200.000 100.000 0.000 -­‐100.000 -­‐200.000 2005 2006 2007 2008 2009 2010 2011 2012 Repurchase Value (Million£) Net Increase in Debt (Million£) (Source: Next Annual Reports)

Looking at the graph below, which illustrates the repurchased share value over the period of time, next management has repurchased shares at right time and right value. This does not seem to be down to Financial Strategy – Share Repurchase – Is it good or bad? Page 10

the value of the share at the time but, firm has clearly been successful in sending the positive signal to market about Next’s business strength, which has reflected in sustained share price increase over the period of time. Based on these numbers, any shareholder who has remained invested in Next during this period has been rewarded handsomely.

Next Share Repurchase ValuaKon 1200 1000 800 600 400 200 0 2005 2006 2007 2008 2009 2010 2011 2012 Repurchase Value (Million£) Today's Value @40 (Million£) Share price at year end (p) (Source: Next Annual Reports 3000 2500 2000 1500 1000 500 0 Repurchase Value at Next Year Price (Million£) Net Profit/Loss (Million£)

(Source: Next Annual Reports) 300 250 200 150 100 50 0 2005 2007 2009 2011 P/E Underlying EPS (p) 15.00 10.00 5.00 0.00 300 200 100 0

EPS & P/E RaKo

No. of Shares & Market Cap (Source: Next Annual Reports) 5,000 4,000 3,000 2,000 1,000 0 2005 2007 2009 2011 Market cap at year end (Million£) Shares in issue at year end (Million)

The reasons for Next's resilience and popularity are well known. It manages stock tightly, doesn't do adventurous acquisitions, finances itself conservatively and mastered the logistics of home shopping via its directory business a decade before the arrival of the Internet. And it generates an awful lot of cash – so much that a share buy-­‐back programme has been running more or less constantly for years. Next management has always stated the ratio of earning enhancement before every share repurchase, also they have managed to complete the major part of their share repurchase as declared, which has reflected in market confidence and its share price. This is clearly a successful example of how share repurchase can increase the shareholders wealth without changing the Debt-­‐Equity ratio drastically.

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Conclusion Share repurchase has been recommended as an alternative for cash dividend to distribute part of the company earning, which can not be invested in business with expected return by shareholders. In theory share repurchases are better for investors as it has lower tax impact, as it is treated at the rate of capital gain instead of normal tax. However share repurchase has been used by managers as a tool for other value specific as well as non-­‐value specific reason like changing the capital structure of the company, maintaining EPS when earnings are lower, issuing management stock options and to reduce takeover threats by reducing equity volume in market. However, in general companies have generally repurchased shares when shares were highly priced and eventual value erosion, which certainly has been proved as a waste of company capital or retained earning. As seen in case study of HPQ & Next, share repurchase is powerful tool, which can be used effectively to return the cash to shareholders in tax effective way, to increase the shareholder’s wealth as well company’s reputation. However if management can not or fail to articulate the future business strategy for which share repurchase needs to be performed then that certainly sends a negative signal to market and can lead to erosion in business value. As share repurchase do not always enhance the wealth of investors, there have been calls for a much stronger light to be shone on this type of activity. To subject share repurchase decisions to closer scrutiny, however, greater disclosure is required. The United Kingdom Shareholders’ Association (UKSA), which represents the interests of private investors, has argued that a repurchase announcement should be accompanied by a clear explanation of the reasons for a repurchase and its likely effect on future profits, capital structure and dividends. The particular method of repurchase should also be justified. UKSA further argues that the annual report should set out a detailed account of any share repurchase, along with a report by the directors on the extent to which the repurchase programme has achieved its objectives6 As many share repurchase have been unsuccessful and did little to enhance the wealth of investors, there needs to be obligation on management to explain the need of share repurchase, its impact on company’s cash flow, future profits, capital structure and dividends. These programmes also need to be scrutinised on regular basis and challenged, if defined strategy is not successfully implemented.

6 United Kingdom Shareholders Association, Position Paper: Share Buybacks, www.uksa.org.uk , 2002

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References Books Corporate Finance Management, Fifth Edition, Glen Arnold Corporate Finance, 2000, Bishop, Steven R., Harvey R. Crapp, Robert W. Faff, and Garry J. Twite

Journals Dividend Policy, Growth and the Valuation of Shares, Journal of Business, October 1961, 411-­‐433

Websites Next Annual Reports -­‐ http://ir2.flife.de/data/next/igb_html/index.php?bericht_id=1000007&index=&lang=ENG HP Annual Reports -­‐ http://h30261.www3.hp.com/phoenix.zhtml?c=71087&p=irol-­‐reportsAnnual The National Bureau of Economic Research -­‐ http://www.nber.org Morning Star -­‐ http://financials.morningstar.com Yahoo Finance -­‐ http://uk.finance.yahoo.com Bloomberg -­‐ http://www.bloomberg.com

Articles http://www.nber.org/digest/feb05/w10599.html http://www.bloomberg.com/news/2010-­‐06-­‐27/bp-­‐losing-­‐21-­‐billion-­‐in-­‐legacy-­‐of-­‐failed-­‐buyback-­‐during-­‐oil-­‐s-­‐boom-­‐ years.html http://www.howtoinvesthq.com/the-­‐truth-­‐about-­‐stock-­‐buybacks/ http://seekingalpha.com/article/289358-­‐do-­‐stock-­‐buybacks-­‐actually-­‐work http://www.investopedia.com/articles/stocks/10/share-­‐buybacks.asp#axzz2N3GPsKhK http://www.ft.com/cms/s/0/6fa506e2-­‐2ca2-­‐11e1-­‐aaf5-­‐00144feabdc0.html#axzz2LBQUtaGr http://www.city-­‐data.com/forum/investing/1180459-­‐where-­‐find-­‐data-­‐share-­‐buybacks.html http://www.cfoworld.co.uk/in-­‐depth/financial-­‐planning/3284236/puncturing-­‐the-­‐myth-­‐of-­‐the-­‐share-­‐buyback/ http://uk.finance.yahoo.com/news/10-­‐most-­‐popular-­‐ftse-­‐100-­‐104000479.html http://www.fool.co.uk/news/investing/2013/01/24/the-­‐10-­‐most-­‐popular-­‐ftse-­‐100-­‐shares.aspx http://www.ft.com/cms/s/0/1cf69214-­‐5a6c-­‐11e2-­‐a02e-­‐00144feab49a.html#axzz2LBQUtaG http://www.marketwatch.com/story/dire-­‐situation-­‐at-­‐h-­‐p-­‐threatens-­‐dividend-­‐and-­‐share-­‐buybacks-­‐2012-­‐10-­‐04 http://beta.fool.com/dmiller5350/2012/10/17/share-­‐repurchases-­‐investment-­‐killers/14272/ http://financials.morningstar.com/valuation/price-­‐ratio.html?t=HPQ®ion=USA&culture=en-­‐us http://247wallst.com/2012/10/04/dire-­‐situation-­‐at-­‐h-­‐p-­‐threatens-­‐dividend-­‐and-­‐share-­‐buybacks/ http://seekingalpha.com/article/725761-­‐don-­‐t-­‐forget-­‐about-­‐hewlett-­‐packard http://seekingalpha.com/article/1032651-­‐the-­‐end-­‐game-­‐at-­‐hewlett-­‐packard-­‐analyzing-­‐the-­‐company-­‐s-­‐takeover-­‐ Financial Strategy – Share Repurchase – Is it good or bad?

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prospects

http://www.guardian.co.uk/business/2011/sep/14/next-­‐share-­‐buyback-­‐retailing-­‐marks http://beginnersinvest.about.com/od/incomestatementanalysis/a/share-­‐repurchase-­‐programs.htm http://www.companylawclub.co.uk/topics/can_a_company_buy_its_own_shares.shtml https://www.boundless.com/finance/dividends/cash-­‐dividend-­‐alternatives-­‐1/drawbacks-­‐share-­‐repurchases-­‐1/ http://tools.morningstar.co.uk/uk/stockprofile/default.aspx?LanguageId=en-­‐ GB&SecurityToken=0P00007ONZ%5D3%5D0%5DE0WWE$$ALL&Id=0P00007ONZ&ClientFund=0&BaseCurrencyId= GBP&InvestmentType=E0

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Appendix HP Financial Details Year Net Earnings (Loss) Weighted Average Shares used for diluted EPS Dilutive Effect of employees stock plans Weighted Average Shares used for diluted EPS EPS (Basic) EPS (Diluted) Short term debt Long term debt Total Debt Total Shareholder's Equity Debt-­‐equity ratio Weighted average interest rate (%) No. of Shares repurchased Share Repurchase Average Share Price Debt Issued S&P Credit Rating (Short Term) S&P Credit Rating (Long term) Operating Income Interest Expense Ref p100 p100 p100 p100 p100 p100 p68 p68

p68 p68 p82 & P76 p82 & P76

p70,69 p70,69

2006 (Million$)

222882 6057 27.18

2007 (Million$)

268981 10887 40.47 4106

8719 458 2008 (Million$) 8329 2483 84 2567 3.35 3.25 10176 7676 17852 38942 0.46 3.60 229646 9620 41.89 3121 A-­‐1 A 10473 421 2009 (Million$) 7660 2388 49 2437 3.21 3.14 1850 13980 15830 40517 0.39 2.70 119651 5140 42.96 6800 A-­‐1 A 10136 721 2010 (Million$) 8761 2319 53 2372 3.78 3.69 7046 15258 22304 40764 0.55 2.00 241246 11042 45.77 3156 A-­‐1 A 11479 505 2011 (Million$) 7074 2094 34 2128 3.38 3.32 8083 22551 30634 39004 0.79 2.40 258853 10117 39.08 11942 A-­‐1 A 9677 695 2012 (Million$) -­‐12650 1974 0 1974 -­‐6.41 -­‐6.41 6647 21789 28436 22833 1.25 2.95 66736 1619 24.26 5154 A-­‐2 BBB 11057 876

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Next Financial Details Year Revenue * (Million£) Profit before tax * (Million£) Taxation * (Million£) Profit after tax * (Million£) Shareholders’ funds (Million£) Underlying EPS (p) Dividends per share (p) Shares in issue at year end (Million) Market cap at year end (Million£) P/E Non Current Liabilities Total Liabilities FTSE INDEX Debt: Capital (Debt +Equity) Debt: Equity 2005 (Million£) 2,858 424 -­‐119 305 276 120.2 41 261 4,157 13.24 432.1 1020.5 5760.3 1.371 -­‐3.697 2006 (Million£) 3,106 449 -­‐136 313 256 127.4 44 246 4,179 13.33 462.2 1217.7 6203.1 1.266 -­‐4.757 2.242 30.100 15 1698 218 291.9 600 382 2007 (Million£) 3,284 478 -­‐147 331 189 146.1 49 227 4,418 13.32 643.2 1381.7 5879.8 1.158 -­‐7.311 1.416 181.000 19 1946 316 261.25 760 444 2008 (Million£) 3,329 498 -­‐144 354 -­‐79 168.7 55 201 2,764 8.15 846.6 1710 4149.6 0.956 21.646 0.915 203.400 26.1 1375 514 286.317 1044 530 2009 (Million£) 3,271 429 -­‐127 302 156 156 55 197 2,162 7.03 906.4 1619.9 5188.5 1.107 -­‐10.384 1.208 59.800 3.9 1097 54 76.674 156 102 2010 (Million£) 3,406 505 -­‐141 364 133 188.5 66 191 3,758 10.43 802 1560.1 5862.9 1.093 -­‐11.730 1.199 -­‐104.400 5.9 1966 120 117.646 236 116 2011 (Million£) 3,298 543 -­‐150 393 232 221.9 78 181 3,614 8.99 727 1559.9 5681.6 1.175 -­‐6.724 1.469 -­‐75.000 10 1994 205 263.9 400 195 2012 (Million£) 3,441 570 -­‐143 427 223 255.4 90 169 4,453 10.33 889.1 1631.5 6276.9 1.158 -­‐7.316 1.335 162.100 12.5 2639 290 500 500 210

Non current liabilities / (Non current liabilities 2.768 + Equity) Net Increase in Debt (Million$) No. of Repurchased Shares Share price at year end (p) Repurchase Value (Million£) Repurchase Value at Next Year Price (Million£) Today's Value @40 (Million£) Net Profit/Loss (Million£) 4 1592 57 67.92 160 103

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