share repurchase

(noun)

Stock repurchase (or share buyback) is the reacquisition by a company of its own stock. In some countries, including the U.S. and the UK, 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 stock, available for re-issuance.

Examples of share repurchase in the following topics:

  • Drawbacks of Repurchasing Shares

    • Share repurchases often give an advantage to insiders and can be used to manipulate financial metrics.
    • There are a number of drawbacks to share repurchases.
    • Both shareholders and the companies that are repurchasing the shares can be negatively affected.
    • Furthermore, share repurchases can be used to manipulate financial metrics.
    • All financial ratios that include the number of shares outstanding (notably earnings per share, or EPS) will be affected by share repurchases.

  • Repurchasing Shares

    • An alternative to cash dividends is share repurchases.
    • In a share repurchase, the issuing company purchases its own publicly traded shares, thus reducing the number of shares outstanding.
    • When a company repurchases its own shares, it reduces the number of shares held by the public.
    • If the company has put rights on its shares, it may use them to repurchase shares at that price.
    • The company repurchases shares from all shareholders who stated a price at or below that repurchase price .

  • Benefits of Repurchasing Shares

    • Share repurchases are beneficial when the stock is undervalued, management needs to meet a financial metric, or there is a takeover threat.
    • A company may seek to repurchase some of its outstanding shares for a number of reasons.
    • Repurchasing shares may also be a signal that the manager feels that the company's shares are undervalued.
    • To do this, the takeover target will repurchase its own shares from the unfriendly bidder, usually at a price well above market value.
    • Share repurchases are one way of lowering the amount of cash on the balance sheet.

  • Reporting Stockholders' Equity

    • Equity (beginning of year) + net income − dividends +/− gain/loss from changes to the number of shares outstanding = Equity (end of year).
    • Share repurchases, in which a firm gives back money to its investors, reducing its financial assets, and the liability of shareholders' equity.
    • For practical purposes (except for its tax consequences), share repurchasing is similar to a dividend payment, as both consist of the firm giving money back to investors.
    • Rather than giving money to all shareholders immediately in the form of a dividend payment, a share repurchase reduces the number of shares, thereby increasing the percent of future income and distributions garnered by each remaining share.
    • The market value of shares in the stock market does not correspond to the equity per share calculated in the accounting statements.

  • Repurchasing Stock

    • The company either retires the repurchased shares or keeps them as treasury stock, available for re-issuance.
    • In an efficient market, the net effect of a stock repurchase does not change the value of each share.
    • So, the net effect of the repurchase would be zero.
    • In an inefficient market that has underpriced a company's stock, a repurchase of shares can benefit current shareholders by providing support to the stock price.
    • Consider a company that repurchases 15,000 shares of its $1 par value stock for $25 per share.

  • Stock Dividends

    • Instead of each shareholder receiving, say $2 for each share, they may receive an additional share.
    • The total number of shares outstanding increases in proportion to the change in the number of shares held by each shareholder.
    • As the number of shares outstanding increases, the price per share drops because the market capitalization does not change.
    • A stock split is paid by switching out old shares for a greater number of new shares.
    • The company may have gotten these shares from share repurchases, or simply from them not being sold when issued.

  • Types of Stock Market Transactions

    • Types of stock market transactions include IPO, secondary market offerings, secondary markets, private placement, and stock repurchase.
    • Stock repurchase (or share buyback) is the reacquisition by a company of its own stock.
    • In some countries, including the U.S. and the UK, 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 stock, available for re-issuance.
    • Firstly, some part of profits can be distributed to shareholders in the form of dividends or stock repurchases.

  • Types of Transactions

    • The buyer buys the shares, and therefore the control, of the target company.
    • Shares in treasury: The buyer increases financial slack (if they don't have to be repurchased on the market), which may improve its debt rating and reduce the cost of debt (although not WACC as cost of equity will increase).
    • Transaction costs include brokerage fees if shares are repurchased in the market; otherwise, there are no major costs.
    • Third, with a share deal the buyer's capital structure might be affected and the control of the buyer modified.
    • If the issuance of shares is necessary, shareholders of the acquiring company might prevent such capital increase at the general meeting of shareholders.

  • Reporting Financing Activities

  • Long-Term vs. Short-Term Financing

    • However, it does result in a dilution of share ownership, control and earnings.
    • Capital notes are a form of convertible security exercisable into shares.
    • Capital notes are similar to warrants, except that they often do not have an expiration date or an exercise price (hence, the entire consideration the company expects to receive, for its future issue of shares, is paid when the capital note is issued).
    • Many times, capital notes are issued in connection with a debt-for-equity swap restructuring: instead of issuing the shares (that replace debt) in the present, the company gives creditors convertible securities – capital notes – so the dilution will occur later.
    • These are short-term loans (normally for less than two weeks and frequently for just one day) arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.