Infy ?9300cr massive share buyback

Well, for starters, they can reinvest this money. Pick up a new project or idea and work on it. Or take a smaller company in a different domain and improve growth prospects. But if those options are limited, it may choose to reward its shareholders by sharing the proceeds with them. They could do this by paying dividends, that is, distributing part of these proceeds among shareholders according to the size of their holdings. Or they could do a stock buyback - "where investors have the option of selling their shares back to the company at a premium".

There are also two ways that companies can do buybacks.

The Tender Offer — In this case, the company makes an offer to buy back its shares at a certain price. It reads, 'I will repurchase a total of 1,000 shares for ?100'. This is 20% more than what the stock is currently trading on. You can part with your shares by completing an online form/application within the next 2 weeks.

Whereas,

The Open market offer — In this type of takeover, everything happens on the stock exchange. The company says, “Listen, I want to buy the shares from you. But the maximum I pay is ?100". You can sell the shares on the stock exchange and I will buy them from there. We will not enter into a direct transactional relationship. And this offer is valid for the next 6 months.

Now, there is a big difference between these two methods.

Look at the tender offer, when the company announced they were going to pay ?100, that's exactly what they were going to pay. The price is fixed. If you're a shareholder selling the shares, you know that's the price you get.

With the open market offering, however, everything is handled through the exchange and the price may vary. The figure of ?100 indicates the maximum amount the company is willing to pay. He might end up buying 10 shares at ?86. He could buy another 10 shares at ?94. And the last 10 at ?98.

Unlike the "bidding route" where the price is predetermined, the open market offer offers several possibilities. They may end up shelling out less money than initially anticipated, and shareholders may walk away a bit disappointed by it all.

Here comes the question — “How does Infosys make its offer open?”

Well, it's going with the "open market" route.?The offering started on 7 December 2022 and the plan was to buy back shares at a maximum price of ?1,850 per share.?But the original announcement came much earlier.?They announced the buyback on 13 October, when the company's shares traded for just ?1,414.?This meant that Infosys was ready to pay almost 30% more.?This is the profit that the shareholders should have pocketed.?But due to the "open market" offering, shareholders may not earn as much as initially expected.

Other factors influencing Buyback:

As we know, dividends don't really drive up the stock price. In fact, after a dividend is paid, the stock price typically drops by a similar amount. But buybacks help support the stock price. When a company is willing to pay a 30% "overpayment" or a premium to the price the stock is trading at, it signals to investors that the stock is undervalued. They put money where their mouth is and can give investors a measure of confidence.?

Apart from that what makes buybacks to companies more attractive is an increase in EPS (earnings per share)

When a company initiates a buyback, it reduces the number of shares on the market. For example, suppose a company owns 200 shares and makes a profit of ?400. His earnings per share are ?2. Now, if it decides to buy back 80 shares from its shareholders, it effectively takes those shares off the market. The company has only 120 shares left. Suddenly the EPS changes. It is now ?3.33. It looks beautiful. In short, shareholders are now allocated more "profit" for each share they own.

It's not just that. From a valuation standpoint, the company looks reasonably better and at a good valuation. It looks like a bargain and could convince more investors to back the company.

Your rationale is simple. They said, "This can lead to the creation of artificial demand for the respective company's shares over such a long period of time and the stock trading at an exaggerated price. Allowing an extended buyback period ensures that efficient pricing is prevented."

Take Infosys, for example. There's no denying that IT stocks, including Infosys, have struggled a bit over the past year. While the benchmark Nifty 50 index returned 6.5%, the Nifty IT index, composed only of software companies, was down 16%.

When Infosys announced the buyback, the stock price skyrocketed. Shareholders know that Infosys will buy shares at a price of 30% higher price over the next 6 months. And that creates artificial support for the stock price.