Share repurchase

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Share repurchase or stock buyback is the re-acquisition by a company of its own stock. In most countries, a corporation can repurchase its own stock by distributing cash to existing shareholders in exchange for a fraction of the company's outstanding equity ; that is, cash is exchanged for a reduction in the number of shares outstanding. The company either retires the repurchased shares or keeps them as treasury stockavailable for re- issuance. In the late 20th and early 21st centuries, there was a sharp rise in the volume of share repurchases in the United States: Large share repurchases started later in Europe than in the United States, but are nowadays a common practice around the world.

It is relatively easy for insiders to capture insider-trading like gains through the use of "open market repurchases". Such transactions are legal and generally encouraged by regulators through safe-harbours against insider trading liability. Companies typically have two uses for profits. Firstly, some part of profits can be distributed to shareholders in the form of dividends or stock repurchases. The remainder, termed open market stock repurchase programs and liquidity preference earnings", are kept inside the company and used for investing in the future of the company, if profitable ventures for reinvestment of retained earnings can be identified.

However, sometimes companies may find that some or all of their retained earnings cannot be reinvested to produce acceptable returns. Share repurchases are an alternative to dividends. When a company repurchases its own shares, it open market stock repurchase programs and liquidity preference the number of shares held by the public. The reduction of the float, [7] or publicly traded shares, means that even if profits remain the same, the earnings per share increase.

Repurchasing open market stock repurchase programs and liquidity preference when a company's share price is undervalued benefits non-selling shareholders frequently insiders and extracts value from shareholders who sell. There is strong evidence that companies are able to profitably repurchase shares when the company is widely held by retail investors who are unsophisticated e. Financial markets are unable to accurately gauge the meaning of repurchase announcements, because companies will often announce repurchases and then fail to complete them.

So, rather than pay out larger dividends during periods of excess profitability then having to reduce them during leaner times, companies prefer to pay out a conservative portion of their earnings, perhaps half, with the aim of maintaining an acceptable level of dividend cover. Some evidence of this phenomenon for United States firms is provided by Alok Bhargava who found that higher dividend payments lower share repurchases though the converse is not true.

If a firm's manager believes their firm's stock is currently trading below its intrinsic value, they may consider repurchases. An open market repurchase, whereby no premium is paid on top of current market price, offers a potentially profitable investment for the manager.

That is, they may repurchase the currently undervalued shares, wait for the market to correct the undervaluation whereby prices increase to the intrinsic value of the equity, and re-issue them at a profit.

Alternatively, they may undertake a fixed price tender offer, whereby a premium is often offered over open market stock repurchase programs and liquidity preference market price; this sends a strong signal to the market that they believe that the firm's equity is undervalued, which is proven by their willingness to pay above market price to repurchase the shares.

Company executive compensation is often affected by share buybacks. Part of their rewards may be tied to their ability to meet earnings per share targets. Moreover, all share buybacks enhance the value of promised shares in their share incentive schemes. Higher share repurchases, in turn, significantly lowered the research and development expenditures that are important for raising productivity. Further, increasing earnings per share does not equate to increases in shareholder value.

This investment ratio is influenced by accounting policy choices and fails to take into account the cost of capital and future cash flows which are the determinants of shareholder value.

Safeguards should be in place to ensure that decisions about share buybacks are not motivated by their effect on executive or managerial reward. Earnings per share targets need adjusting to take out the financial leveraging effect of the buyback and similarly open market stock repurchase programs and liquidity preference incentive schemes need adjusting to neutralize unwarranted enhancement.

Share repurchases avoid the accumulation of excessive amounts of cash in the corporation. Companies with strong cash generation and limited needs for capital spending will accumulate cash on the balance sheetwhich makes the company a more attractive target for takeover, since the cash can be used to pay down the debt incurred to carry out the acquisition.

Anti-takeover strategies, therefore, often include maintaining a lean cash position and share repurchases bolster the stock price, making a takeover more expensive. Share repurchases also allow companies to distribute their earnings to investors without inflicting them with taxation. Of course, the market will not necessarily respond to a dividend payment by selling off shares and reducing share price; while the payment of the dividend technically reduces the company's book value, the ability and willingness to pay a dividend is often seen positively, and the share price may even increase.

Ultimately, there should be no net change in investor wealth assuming a fully equity-financed business. This disparity assumes there is no capital gains tax for the selling share holders. A firm will announce that it will repurchase some shares in the open market from time to time as market conditions dictate and maintains the option of deciding whether, when, and how much to repurchase. Open-market repurchases can span months or even years.

There are, however, daily buyback limits which restrict the amount of stock that can be bought over a particular time interval again ranging from months to even years. Open-market stock repurchases which open market stock repurchase programs and liquidity preference add to the long-term demand for shares in the market are likely to affect prices as long as the repurchase operations continue. AstraZeneca claimed at the AGM that their open market interventions would not have temporary price effects whilst the interventions continued, but offered no evidence.

Prior toall tender offer repurchases were executed using a fixed-price tender offer. This offer specifies in advance a single purchase price, the number of shares sought, and the duration of the offer, with public disclosure required. The offer may be made conditional upon receiving tenders of a minimum number of shares, and it may permit withdrawal of tendered shares prior to the offer's expiration date.

Shareholders decide whether or not to participate, and if so, the number of shares to tender to the firm at the specified price. Frequently, officers and directors are precluded from participating in tender offers.

If the number of shares tendered exceeds the number sought, then the company purchases less than all shares tendered at the purchase price on a pro rata basis to all who tendered at the purchase price.

The introduction of the Dutch auction share repurchase in allows an alternative form of tender offer. A Dutch auction offer specifies a price range within which the shares will ultimately be purchased. Shareholders are invited to tender their stock, if they desire, at any price within the stated range. The firm then compiles these responses, creating a demand curve for the stock. If the number open market stock repurchase programs and liquidity preference shares tendered exceeds the number sought, then the company purchases less than all shares tendered at or below the purchase price on a pro rata basis to all who tendered at or below the purchase price.

If too few shares are tendered, then the firm either cancels the offer provided it had been made conditional on a minimum acceptanceor it buys back all tendered shares at the maximum price. Open market stock repurchase programs and liquidity preference first firm to use the Dutch auction was Todd Shipyards in In broad terms, a selective buyback is one in which identical offers are not made to every shareholder, for example, if offers are made to only some of the shareholders in the company.

In the United States, no special shareholder approval of a selective buyback is required. Selling shareholders may not vote in favor of a special resolution to approve a selective buyback. The notice to shareholders convening the meeting to vote on a selective buyback must include a statement setting out all material information that is relevant to the proposal, although it is not necessary for the company to provide information already disclosed to the shareholders, if that would be unreasonable.

A company may also buy back shares held by or for employees or salaried open market stock repurchase programs and liquidity preference of the company or a related company. This type of buyback, referred to as an "employee share scheme buyback", requires an ordinary resolution.

A listed company may also buy unmarketable parcels of shares from shareholders called a "minimum holding buyback". This does not require a resolution but the purchased shares must still be canceled. From Wikipedia, the free encyclopedia.

The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject. You may improve this articlediscuss the issue on the talk pageor create a new articleas appropriate. December Learn how and when to remove this template message. A Practical Guide for Managers. NPV Publishing,Chapter 8.

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Retrieved from " https: Articles with limited geographic scope from December USA-centric. Views Read Edit View history. This page was last edited on 28 Aprilat By using this site, you agree to the Terms of Use and Privacy Policy. Look up Share repurchase in Wiktionary, the free dictionary.

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