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The past few years have seen discussions around the wax and wane of a shares buyback or share repurchase, questioning whether it’s a healthy move for both companies and investors. While some chidings were true, a majority of them seem like misspoken facts due to a lack of understanding about the share repurchase. Financial markets accoladed companies for using share repurchase as a strategic tool to enhance operational performance.
This article shares a deeper insight into how a share repurchase is done, its advantages and disadvantages, and more.
Share buyback or share repurchase is when a company buys shares back from existing shareholders. The share repurchase or buyback deal encompasses two mutually interested parties, i.e., a shareholder and the company. Upon buying back the shares from the shareholders, the company holds maximum ownership over its business. As a result, protecting the company from hostile takeovers or underpriced acquisitions. Share buyback or share repurchase also creates the stock options facility for its employees, giving them the benefit to buy them at a discount or fixed price.
Unlike the dividend program, the share repurchase program is easy to incorporate and execute in the market. Moreover, the share repurchase is a modus operandi to give back the capital to the shareholders. Once the share repurchase is executed between the company and the shareholder, those shares are off the market.
Companies endure various nuances at the time of share repurchase globally. The company can repurchase the shares and display them as treasury shares under the assets side of the balance sheet. The other way to execute the share purchase is to buy all the shares and truncate the outstanding shares in the market. A few other ways include the following:
There are plenty of reasons behind the share repurchase program. Below are a few of them:
As the adage goes like this “every coin has two sides”, the share repurchase does have pros and cons too. If you are an investor, you should know these before investing in any company:
Share repurchase requires adequate funds for the company to pay to the shareholders upon redeeming the existing shares in the market. Additionally, even the company’s business and growth rely on liquidity and cash availability. Some of the ways a company can finance funds for the share repurchase are as follows:
Share repurchase is a great strategy run by companies to get their business under control. The program has its share of differences and numerous methods to deal with the process. Every share repurchase program is done distinctly. No one of the methods has any obligation or onus on the shareholders to give back their shares for a predetermined price.
However, the USP is to keep the ownership and authority in their hands instead of leaving it to freeloaders to capture the company. At the end of the day, the decision lies in the hands of the shareholders whether to proceed with the selling of shares back to the company or not. If you are looking for a tax benefit, share repurchase has got an upper hand, unlike dividends.
Share repurchase is done due to a multitude of reasons. There’s no single agenda that sticks to why a company goes for it. However, the purpose is to claim back the majority of authority and power from the market and reinvest in the company again.
Share repurchase is done in several ways. Each company has a different approach to the process of redeeming the shares from the shareholders. Some of the methods of share repurchase are tendering, dutch auction tender, buying back in the open market, and direct negotiation. All the processes are explained above in detail.
Yes. Share repurchase improves various financial ratios in the company like the EPS value spikes as and when the outstanding shares in the market decrease. Even the return on equity value appreciates accordingly. Following that, you’ll also witness a plunge in the PE ratio. Other than that, the shareholders also get tax benefits, where they pay less on capital gains.
Generally, when a company buys back the shares from the market, i.e., shareholders, the price of the shares elevates. Any kind of reduction in the shares in the open market causes demand and supply. This leads to supply shock and fluctuations in the share price.
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