Stock Repurchase

Stock repurchase or stock buyback is the process of a company purchasing its own stock from the current holder. The company simply buys back the stock from the capital market base on the market price. Or they go to negotiate with the major holders and offer them a fixed price which is higher than the market.

Share buyback will decrease the outstanding number of shares in the market and it will impact supply and demand. Most of the cases, the price will increase as the number of share decrease.

The company can repurchase the stock directly from the free market which is straightforward. However, it may take time and it is hard to control the number of shares to be purchased. The holders may keep increasing the selling price after realizing about stock repurchase.

Another option is a tender offer which means the company will make a tinder offer to the current holder. They will set a valid period and price which is higher than the market so that they can control the time and amount paid to acquire a share. However, it still not guarantee the number of shares as the holder may find it not profitable.

Reason for Stock Repurchase

Share price is undervalue

Management may see the opportunity when the share is trading at a lower price while the company’s valuation is much higher. They may decide to buyback and hold for a short term and sell to the market for a profit.

To Boost the share price

As we have mentioned, share buyback can increase the share price when the outstanding share decrease (supply decreases) and the demand remain the same. It will help to improve the share price and financial performance. It can attract the market when the company is buying its own share, market will view it as a positive signal in the future. Moreover, the EPS will increase as well when the number of share decrease. It is one of the KPI to access company performance.

Get rid of surplus cash

Some big companies like Apple have huge surplus cash which remains after reinvesting, so another option of using the cash is to buyback the share. Company issue share to raise capital for expansion, so when they have surplus cash, they will buyback the share to gain back the ownership.

To change the capital structure

The company is invested by both debt and equity, the balance between two options is different from one company to another depending on the risk, law and regulation, and shareholders intention. So the management may want to buy back the share and replace them with debt in order to save tax.

Disadvantage

Lack of investment opportunity

The investors may believe that the company does not have any investment opportunity and they decide to buy back the share instead of using the cash to expand the business. It will lead to share price decrease after the buyback period.

Can’t meet other financial obligation

Using the surplus cash to buy back the share with proper planning may lead to a lack of funds to fulfill the other financial obligations and cause serious issues such as bankruptcy.