Share Repurchases

A share repurchase is a decision by a company to buy back its shares from the marketplace using corporate cash. Hence it can be viewed as a cash dividend alternative.

Treasury shares are stocks that have been repurchased to be reissued. Canceled shares are stocks that have been repurchased and later retired.  Share repurchases in many jurisdictions are subject to some level of restrictions, such as the requirement for shareholders’ approval and a limit on the number of outstanding shares to be repurchased. There are four main ways a company repurchases its shares:

1. Buy Back in the Market

The company simply buys back its own shares as conditions are favourable in the open market. Due to no legal obligation to complete or undertake the repurchase, this method is the most flexible. The approval of shareholders for shares to be repurchased is required in some regions such as Europe. The announcement of a buyback provides a psychological support for the share price.

2. Buy Back a Fixed Number of Shares at a Fixed Price

This occurs when a company makes a fixed price tender offer to buy back a specific quantity of the shares at a fixed price above the current market price.

3. Dutch Auction

This is a tender offer where a company stipulates a range of acceptable prices instead of a fixed price for specific shares. This method identifies the smallest price at which a company can buy back the desired amount of shares, and then the corporation pays that price to all qualifying bids.

4. Repurchase by Direct Negotiation

Some markets allow companies to negotiate with majority shareholders to repurchase their shares above the current market price. The company may dampen the share price by keeping many shares from overhanging in the market. 

Question

Which one of the following is most likely an advantage of a fixed price tender offer over an open market share repurchase?

1. It is relatively cheaper than an open market share repurchase.
2. It is faster to execute than an open market share repurchase.
3. It is more flexible than an open market share repurchase.

Solution

The correct answer is B.

Fixed-price tenders can be accomplished faster than open market share repurchases.

A is incorrect. Fixed price tender has to offer a premium that raises the payback cost.

C is incorrect. The opposite is true. Open market share repurchases are more flexible because investors can time the repurchases.

Reading 18: Analysis of Dividends and Share Repurchases

LOS 18 (h) Compare share repurchase methods.