Buyback of Shares

When a firm buys back its own shares from investors either through excess cash or borrowed funds, it is known as a share buyback or share repurchase. It can be viewed as a tax-efficient alternative to returning money to shareholders. Shares that have been repurchased are considered cancelled, but they can be kept for future redistribution.

Reasons for which companies consider share buyback can be as follows:

• Companies issue shares to raise equity capital to fund expansion, but if no potential growth opportunities are visible or there is little headroom left to grow into, carrying large amounts of equity capital on the balance sheet becomes more of a burden than a blessing and sharing ownership for no good reason. Shareholders demand dividends as a return on their investments, which is a cost of equity.?Buying back part or all of the outstanding shares might be a straightforward strategy to repay investors while also lowering the overall cost of capital.
• Companies employ buybacks to boost equity value when there is market pessimism. If a stock is significantly undervalued, the issuing firm can repurchase some of its shares at the lower price and then reissue them once the market has corrected, effectively raising its equity capital without issuing any new shares.
• Buying back stock is also a simple way to make a company appear more appealing to investors. The profits per share (EPS) ratio of a corporation is automatically increased when the number of outstanding shares is reduced. For example, a corporation with 50,000 outstanding shares and a yearly profit of $5 million has an EPS of $100. If it buys back 10,000 of those shares, bringing the total number of outstanding shares down to 40,000, its EPS rises to $125, despite no increase in earnings.

Method for buyback of shares

1. Stock buybacks on the open market: A corporation buys back its stock from the open market. The transactions are carried out by the firm's brokers. Because a large number of shares must be purchased, share buybacks typically take a lengthy time. Stock buybacks in the open market, on the other hand, do not place any legal duties on a corporation to execute the buyback programme, unlike other ways. As a result, a company's stock repurchase programme might be cancelled at any time.

2. Tender offer with a set price: A corporation makes a tender offer to its shareholders to purchase back their shares at a set price on a set date. Almost often, the tender offer price includes a premium over the current share price. Then, those shareholders who want to sell their stock do so by submitting the number of shares they want to sell to the firm. In general, a fixed-price tender offer enables a stock repurchase to be completed in a short amount of time.

3. Offer for a Dutch auction tender: A corporation makes a tender offer to shareholders to buy back shares and specifies a range of possible values, with the minimum price of the range being set above the current market price. The shareholders then make their bids by stating the number of shares they want to sell and the minimum price they are willing to sell them for. To finish the buyback programme, a corporation evaluates the bids received from shareholders and calculates the appropriate price within a previously defined price range.

4. Direct negotiation: A corporation contacts one or more significant shareholders directly to purchase back the company's shares. The acquisition price of the shares includes a premium in this case. The main advantage of this strategy is that a corporation may directly negotiate the buyback price with a shareholder. As a result, under some circumstances, this strategy might be extremely cost-effective. Direct negotiations with shareholders, on the other hand, can be time-consuming.

Recent Buyback

Recently Tata consultancy services (TCS) announced its Rs 18000 crore share buyback for Rs 4500 per share. This is the company’s fourth and biggest buyback in the last five years. Company is going with the tender offer mechanism of share buyback.

We hope you now have a better understanding of what stock repurchase implies and why companies conduct it. Also, we hope you found this blog to be educational and that you will put it to good use in the real and practical?world.