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Share repurchase (or share buyback or stock buyback) is the re-acquisition by a
company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of both, with a specific objective. Company members share a common pu ...

company
of its own shares. It represents an alternate and more flexible way (relative to
dividend A dividend is a distribution of profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit ...

dividend
s) of returning money to shareholders. 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 Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the differe ...
; that is, cash is exchanged for a reduction in the number of
shares outstanding Shares outstanding are all the share Share may refer to: * Share, to make joint use of a resource (such as food, money, or space); see Sharing * Share (finance), a stock or other financial security (such as a mutual fund) * Share, Kwara, a town and ...
. The company either retires the repurchased shares or keeps them as
treasury stock A treasury stock or reacquired stock is stock In finance, stock (also capital stock) consists of all of the shares In financial markets A financial market is a market in which people trade financial securities and derivatives at ...
, available for re- issuance. Under U.S.
corporate law Corporate law (also known as business law or enterprise law or sometimes company law) is the body of law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules t ...
, there are six primary methods of stock repurchase: open market, private negotiations, repurchase "
put
put
" rights, two variants of self-tender repurchase (a fixed price
tender offer In corporate finance, a tender offer is a type of public takeover bid. The tender offer is a public, open offer or invitation (usually announced in a newspaper advertisement) by a prospective acquirer to all shareholders, stockholders of a public c ...
and a
Dutch auction A Dutch auction is one of several similar Auctions#Types, types of auctions for buying or selling goods. Most commonly, it means an auction in which the auctioneer begins with a high asking price in the case of selling, and lowers it until some p ...
), and accelerate repurchases. More than 95% of the buyback programs worldwide are through an open-market method, whereby the company announces the buyback program and then repurchases shares in the open market (stock exchange). In the late 20th and the early 21st century, there was a sharp rise in the volume of share repurchases in the United States:
US$ The United States dollar (symbol A symbol is a mark, sign, or word In linguistics, a word of a spoken language can be defined as the smallest sequence of phonemes that can be uttered in isolation with semantic, objective or pragmatics, ...
5
billion A billion is a number with two distinct definitions: *1,000,000,000 1,000,000,000 (one billion A billion is a number with two distinct definitions: *1,000,000,000 1,000,000,000 (one billion, short scale; one thousand million or milliar ...
in 1980 rose to US$349 billion in 2005. Large share repurchases started later in Europe than in the United States, but are nowadays a common practice around the world. U.S. Securities and Exchange Commission (SEC) rule 10b-18 sets requirements for stock repurchase in the United States.


Purpose

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 of profits are
retained earnings The retained earnings (also known as plowback) of a corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity recognized by priva ...
, 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 reduces the number of shares held by the public. The reduction of the float, or publicly traded shares, means that even if profits remain the same, the earnings per share increase. Repurchasing shares 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.g., small investors) and more likely to sell their shares to the company when those shares are undervalued. By contrast, when the company is held primarily by insiders and institutional investors, who are more sophisticated, it is harder for companies to profitably repurchase shares. Companies can also more readily repurchase shares at a profit when the stock is liquidly traded and the companies' activity is less likely to move the share price. Financial markets are unable to accurately gauge the meaning of repurchase announcements, because companies will often announce repurchases and then fail to complete them. Repurchase completion rates increased after companies were required to retroactively disclose their repurchase activity, the result of an effort to reduce the perceived or potential exploitation of public investors. Normally, investors have more of an adverse reaction to dividend cuts than postponing or even abandoning the share buyback program. 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 American firms is provided by
Alok Bhargava Alok Bhargava (born 13 July 1954) is an Indian econometrics, econometrician. He studied mathematics at Delhi University and economics and econometrics at the London School of Economics. He is currently a full professor at the University of Ma ...
who found that higher dividend payments lower share repurchases though the converse is not true. Aside from paying out free cash flow, repurchases may also be used to signal and/or take advantage of undervaluation. 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 current 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. However, scholars also suggest that repurchases sometimes might be a cheap talk and convey a misleading signals due to the flexibility of repurchases. 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.http://www.propershareschemeadjustment.com Bhargava reported that
stock options In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...
exercised by top executives increase future share repurchases by U.S. firms. 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 In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plant l ...
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 share 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 sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such ...

balance sheet
, which 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.


Tax-efficient distribution of earnings

Share repurchases also allow companies to distribute their earnings to investors without resulting in immediate taxation on capital gains. For example, if a company were to pay $100,000 in dividends on one million shares or as 10¢ dividend per share, investors may incur tax upon this disbursement. This means that instead of receiving 10¢ of earnings per share, they receive 8.5¢ (.10×(1 − .15)) at a 15% tax rate with 1.5¢ going to the government. An investor with 10 shares will receive 85¢ and the government collects 15¢. As the company has to pay out this money the share price drops accordingly, from $10 to $9.90, so the investor with 10 shares now has $99 + 85¢ dividend, or $99.85. Of course, investors 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. Compare this with spending $100,000 buying back shares. This will remove 10,000 shares from the market, leaving 990,000 shares at $10 each (($10,000,000 − US$100,000)/990,000 = $10). Now, the investor with 10 shares still has US$100, and the government receives no immediate tax revenue. Ultimately, there should be no net change in investor wealth assuming a fully equity-financed business. This disparity however assumes there is no
capital gains tax A capital gains tax (CGT) is a tax on the profit realized on the sale of a non-inventory asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (t ...
for the selling shareholders. NYU professor Edward Wolff has criticized this approach for exacerbating the existing wealth inequality in the U.S. by shifting the tax burden away from the richest 1% of U.S families, which by 2016 held nearly 40% of the nation's wealth, to the bottom 90% which holds nearly half this amount. Share buy-backs are more tax-efficient than dividends when the tax rate on capital gains is lower than the tax rate on dividends.


Methods


Open market

The most common share repurchase method in the United States is the open-market stock repurchase, representing almost 95% of all repurchases. A firm will announce that it will repurchase some shares in the
open market The term open market is used generally to refer to an economic situation close to free trade Free trade is a trade policy A commercial policy (also referred to as a trade policy or international trade policy) is a government's policy governin ...

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. According to SEC Rule 10b-18, the issuer cannot purchase more than 25% of the average daily volume. Open-market stock repurchases which greatly add to the long-term demand for shares in the market are likely to affect prices as long as the repurchase operations continue. For example,
AstraZeneca AstraZeneca plc () is a British-Swedish multinational pharmaceutical A medication (also called medicament, medicine, pharmaceutical drug, medicinal drug or simply drug) is a drug File:Aspirine macro shot.jpg, Uncoated aspirin Tabl ...
embarked on an $11 billion share repurchase in 2011 and 2012 in a market which they estimated had an annual turnover of $30 billion, when excluding short-term share transactions. AstraZeneca claimed at the 2013 AGM that their open market interventions would not have temporary price effects whilst the interventions continued, but offered no evidence.


Fixed-price tender

Prior to 1981, all 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 ''Pro rata'' is an adverb or adjective meaning in equal portions or in proportion. The term is used in many legal and economic contexts. The hyphenated spelling ''pro-rata'' for the adjective form is common, as English_compound#Hyphenated_compound_ ...
basis to all who tendered at the purchase price. If the number of shares tendered is below the number sought, the company may choose to extend the offer's expiration date.


Dutch auction

The introduction of the
Dutch auction A Dutch auction is one of several similar Auctions#Types, types of auctions for buying or selling goods. Most commonly, it means an auction in which the auctioneer begins with a high asking price in the case of selling, and lowers it until some p ...
share repurchase in 1981 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 In economics Economics () is a social science Social science is the Branches of science, branch of science devoted to the study of society, societies and the Social relation, relationships among individuals within those societies. ...

demand curve
for the stock.Bagwell, Laurie Simon, "Dutch Auction Repurchases: An Analysis of Shareholder Heterogeneity" 1992, ''Journal of Finance'', Vol. 47, No. 1, 71–105. The purchase price is the lowest price that allows the firm to buy the number of shares sought in the offer, and the firm pays that price to all investors who tendered at or below that price. If the number of 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 acceptance), or it buys back all tendered shares at the maximum price. The first firm to use the Dutch auction was Todd Shipyards in 1981.


Types


Selective buybacks

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. In the UK, however, the scheme must first be approved by all shareholders, or by a special resolution (requiring a 75% majority) of the members in which no vote is cast by selling shareholders or their associates. 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.


Other types

A company may also buy back shares held by or for employees or salaried directors 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 back its shares in on-market trading on the stock exchange, following the passing of an ordinary resolution if over the 10/12 limit.The 10/12 limit refers to
ASIC An application-specific integrated circuit (ASIC ) is an integrated circuit An integrated circuit or monolithic integrated circuit (also referred to as an IC, a chip, or a microchip) is a set of electronic circuit 200px, A circuit b ...
's requirement that companies buy back no more than 10% of the voting rights in the company within 12 months
"Share Buybacks"
Australian Securities and Investments Commission The Australian Securities and Investments Commission (ASIC) is an independent commission of the Australian Government tasked as the national corporate regulator. ASIC's role is to regulate company and financial services and enforce laws to pro ...
The stock exchange's rules apply to "on-market buybacks". 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.


Notes


Further reading

* Andriosopoulos, Dimitris, and Meziane Lasfer. "The market valuation of share repurchases in Europe". ''Journal of Banking & Finance'' 55 (2015): 327–339.
online
* Jun, Sang-gyung, Mookwon Jung, and Ralph A. Walkling. "Share repurchase, executive options and wealth changes to stockholders and bondholders". ''Journal of Corporate Finance'' 15.2 (2009): 212–229. * Schumpeter, "Six muddles about share buy-backs: Stock repurchases by American firms are on the rise. So is the confusion surrounding them"
''The Economist'' 31 May 2018
* Wesson, N., B. W. Bruwer, and W. D. Hamman. "Share repurchase and dividend payout behaviour: The South African experience". ''South African Journal of Business Management'' 46.3 (2015): 43–54. {{DEFAULTSORT:Share Repurchase Stock market Contexts for auctions