I am not certain of the accounting treatment of the buybacks and their short-term impact on the payments due ACAS. However, the best long-term result for ACAS lies in the improvement in cash flow and dividends for AGNC and MTGE. When the price of those two stocks exceeds their book values, ACAS can issue new shares, benefitting the shareholders of all three companies. The stock price of AGNC and MTGE will improve with improved financial performance (in cash flow and dividend payments per share), and by ACAM demonstrating that it is acting in the best interests of the shareholders. The buybacks contribute, appropriately, to this perception--in addition to raising per share cash flow and, at some point, dividend payments. I believe we are close to or at a floor in quarterly dividends for both AGNC and MTGE, that both companies will be reporting higher book value per share next week, and that the recovery in their share prices will continue (I hold stock in both ACAS and MTGE). Thus, even if the buybacks for MTGE and AGNC have some small-scale short-term impact on ACAS--and I am not sure they do--the long term contribution to ACAS is unambiguously positive.
This is a continuation of my previous post, which Yahoo cut short, presumably due to its length.
The undervaluation of ACAS will be overcome when the company's disparate parts are separated into two (or more) separate companies: a growth company asset manager and a dividend-paying business development company. I expect this to happen within 6 months.
The latest Motley Fool Article focuses on just one determinant of ACAS value--interest rates. It is of course correct in pointing out that interest rates will have to rise at some point over the next few years. However, the analysis is one-dimensional. Interest rate increases typically reflect one of two major forces: a strong economy increases the demand for financial capital or inflationary pressures force the Fed to raise rates; of course these two may be overlapping. In a strengthening economy, the companies in ACAS's portfolio are likely to be doing better; the improvement in their performance could well outweigh the negative impact of rising interest rates. The impact of inflation will vary depending on the type of business involved, so there may be some offset in that case as well. Moreover, there is at present so much excess capacity in the economy and economic growth will be moderate at best over the coming years, so that inflationary threats are unlikely to be serious for some time.
In addition to these considerations, private equity firms typically invest in companies whose performance they expect to improve before re-selling them at a higher price. If they are successful in doing so, the improved performance in a strengthening economy--much more likely to bring about higher interest rates in the next five years than inflationary pressures--should be greater than it would be in a stagnant economy, further offsetting the negative impact of higher interest rates.
Finally, the negative impact of higher interest rates anticipated in the Motley Fool article would apply to all firms, yet most sell above book value. Thus to explain the ACAS discount from book value as a rational response to the prospect of higher interest rates does not seem adequate. In the last analysis, the discount to book value of ACAS appears tied mainly to the company's combination of two disparate businesses: asset manager and business development company.