Buyback is a repurchase of securities by the issuer from their current owners. When declaring a buyback, a joint-stock company redeems a certain share of securities from investors, that is, it actually takes a certain part of its securities from circulation.
In general, repurchase is carried out in the following cases:
1. For the sale of accumulated (free) funds that are not used by the issuer to invest in other areas of the company.
2. Buyback allows you to strengthen the positions and shares of the largest shareholders.
3. Protection against hostile takeover or change of ownership. The presence of accumulated free money and non-realization of it for new projects may indicate stagnation (stagnation) of the organization, which may lead to a decrease in share prices. And cheap shares are much easier to buy, and this can be done by competitors.
4. Change in capital structure.
5. Stimulation of the company’s management. In the event of a buyback, the issuer may transfer the repurchased shares to its employees.
6. Stimulating the growth of quotes of the issuer’s shares or maintaining the level of quotes at the current level. Announced buybacks can significantly increase the demand for securities, which will lead to a noticeable increase in their value.
After reducing the number of shares in circulation, the logical consequence is an increase in profit per 1 security, which also makes the issuer attractive to future investors.
7. Reducing excess liquidity.
8. Decreasing the number of votes at the meeting of shareholders.
9. Dividend aspect. The amount allocated for the payment of dividends is taxed, but the amount for the redemption of shares is not.
What does a buyback give a shareholder?
• Since the share buyback occurs at a price higher than the market price, the shareholder will sell the shares at a price higher than the current one, or (if he does not sell) will continue to own shares, the value of which will be higher.
• As noted above, write-offs of repurchased shares increase earnings per share, which is beneficial for equity holders.