Buyback. How companies buy their own shares and why they need itHow companies buy back shares
You can buy back shares from the stock exchange in the following ways:
1. Buyback of shares on the open market;
2. Tender redemption of shares
3. Tender redemption as a "Dutch" auction.
Buyout on the open market
This method is most often used by companies in comparison with other types of buyback and has several features:
– Share buyback procedure. Issuer, its subsidiary or hired agent (broker), like any other investor, buys shares on the stock exchange. These can be daily or recurring purchases.. At the same time, they do not advertise their activity on the trading platform - the volume, price and time of transactions are not announced. This is for, so that market participants cannot speculate on the buyback of shares. Purchase volumes and prices can be published a few days after the completion of transactions.
– Program duration. Varies from several months to several years - announced by the company in advance, but may subsequently be extended or terminated at the discretion of the issuer.
– Buyback volume. Installed by the company, there are no formal barriers. Can be nominated in the number of shares, monetary equivalent, share of the authorized capital.
– Buyback site. Buying up of shares can take place on different sites, where is the company represented. What is the total volume of buybacks on a particular site?, unknown. Often there is no big difference between the location of the buyback due to the presence of arbitrageurs.
Arbitrageurs - market participants, who earn on the difference in the price of assets on different sites. For instance, if the company's shares are traded on the Moscow Stock Exchange cheaper, than on the LSE, then the arbitrageur can buy securities in Russia and sell them in London.
– Type of shares. Securities can be repurchased in the form of shares or depositary receipts at the discretion of the company.
Buyback on the open market, usually, has the most positive effect on the market price of shares, since the company creates additional demand for securities through a buyout for a certain period of time. In this way, the balance of market supply and demand is shifting, stimulating shares to grow - this is the benefit of buyback from the open market for shareholders.
It is worth noting, that buyback from the open market is a flexible tool for the company. The Issuer, at its discretion, may suspend, wind up or renew the share buyback program depending on market conditions. Together with the greatest influence on the dynamics of quotes, this determines the high popularity of this type of buyback..
MTS
18 Martha 2021 G. The Board of Directors of MTS approved the buyback of its own ordinary shares and ADR for total cost, not exceeding 15 RUB billion. Share buyback program entered into force 30 Martha 2021 G. valid until the end 2021 G.
Shares are purchased by MTS subsidiary company Bastion LLC every day. In parallel with this, part of the shares within the buyback are bought directly from the largest shareholder of MTS - AFK Sistema.
VSMPO-AVISMA
The buyback program is valid from 17 november 2020 G. on 31 December 2021 G. inclusive. Total amount of funds, aimed at redemption of shares - no more 5 RUB billion.
The redemption of shares is carried out by a subsidiary of LLC Avitrans from time to time.
Tender redemption of shares
A tender redemption of shares involves the acquisition of the entire volume of shares at a certain moment. How it happens:
1. The company announces its intention to repurchase a certain number of shares at a pre-announced price within a specified period.
2. To participate in the buyback, shareholders must submit an application - applications are accepted before a predetermined date for at least 30 days.
3. If the total volume of shares presented for redemption exceeds the maximum buyback volume, then the securities are purchased from shareholders in proportion. I.e, if within the framework of the buyback the company was going to redeem 50 thousand. Shares, and the shareholders presented 100 thousand, then everyone who participated in the ransom will be purchased only 50% declared securities.
4. Shareholders receive money for redeemed shares within a period not exceeding 15 days.
What are the features here. Firstly, much depends on the price of the share in the framework of the buyback, namely from its difference in relative market value. If the buyback is announced with a premium to the market, then you can wait for a positive reaction of the shares - investors can buy securities in order to present them for redemption.
The second point - most often the volume of shares presented for redemption exceeds the maximum buyback volume, therefore, applications are satisfied proportionally. The buyback rate can vary greatly depending on the price difference relative to the market, stock prospects, the company's plans to use the acquired shares, as well as from participation in the buyback of majority shareholders.
Because of, that not all shares declared within the buyback can be redeemed, there is uncertainty about the impact of the buyback on the dynamics of shares. The lower the expected proportional buyback ratio, the weaker the positive effect of the buyback premium to the market is reflected in the dynamics of securities.
It also follows from the specifics of the conduct, that the additional demand for shares, as within the buyback from the open market, does not appear. Quicker, one might say, that due to the tender redemption, part of the market supply is absorbed - potential sellers of shares can use the buyback, to exit the asset at good prices, without creating pressure on quotes by their actions. Thus, the activity of bears in the paper decreases.
nornickel
The company announced the launch of buyback 27 April up to 5,4 million shares. Application deadline - from 20 May 2021 G. on 18 June 2021 G. inclusive. The shares are planned to be paid up to 3 July 2021 G. The buyback price is set at 27 780 rub. per share. A major shareholder of Norilsk Nickel - RUSAL - participated in the buyback.
As a result, the total number of shares, in respect of which applications for their sale have been received, Was 64,2 million pieces. The proportional acquisition ratio was 8,38%.
Dutch auction
The auction name is linked to the system, used at flower auctions in Holland. The principle implies the announcement of the minimum and maximum prices, which the auction participants are willing to pay. Then bids are submitted at prices acceptable to them in the specified range.. Respectively, participants set the final price level, according to which the asset will be redeemed.
After accepting the entire number of applications, prices are sorted in ascending order and the minimum price is determined, which can provide a full redemption of the entire offer. All orders are executed at this price, which have not exceeded the minimum.
Dutch auction is not common in Russian practice, however applied by foreign issuers. Microprocessor manufacturer Qualcomm since late July 2018 G. on 27 august 2018 G. held a Dutch auction to buy back its own shares for a total amount $10 billion. The offer price ranged from $60 to $67,5.
Output: In aggregate, all the indicated buyback methods, usually, have a positive effect on the dynamics of shares, thereby providing shareholders with additional profitability. The most effective influence on the dynamics of securities is most often provided by the buyback of shares from the open market. Much depends on the buyback price within the tender redemption and the Dutch auction, but almost always the overhang of sellers is reduced, creating an opportunity for stocks to rise.
Treasury shares
As part of any of the above buyback methods, a package of treasury shares is formed on the balance sheet of the company or its subsidiary - these are the issuer's securities, which belong to him.
Further options for using the treasury package of companies can be:
– Cancellation of shares. In this case, a decision is made to reduce the authorized capital, repurchased shares are destroyed. This leads to the fact, that the number of securities is decreasing, and the share of earnings per share is growing. That is, with the same profit, dividends per share increase. This option can be called the most positive for shareholders in terms of profitability..
– Sale of shares on the stock exchange. Most often, the decision to repurchase shares is made, when management considers, that the company is underestimated. If managers are convinced, that the current estimate is fair or even overstated, then it is logical to sell the treasury package back to the market. In this case, the company will make a profit on the difference between buying and selling., and the proceeds can be spent on development or dividends.
– Management incentive program. The situation is quite common, when the treasury package is used as a compensation for the company's management. Is considered, that when managers own a stake in a company, then they are more interested in the growth of the share price, because their capital directly depends on this.
– Payment facility for mergers and acquisitions (M&A). Sometimes a company can acquire another business by paying with its own shares instead of money. This option is interesting to those, that the pressure on the liquidity position of the company within the framework of the transaction is minimized.
– Keep on balance. The treasury stake is held on the balance sheet of the company until, how will the conditions for its use appear.
Output: Treasury package is formed with any buyback option. Further, these securities can be used at the discretion of the company. From the point of view of shareholder return, the most positive way to dispose of the treasury stake is the cancellation of shares.. In this case, earnings per share and potential dividends rise.. Moderately positive use cases for stocks: launching a management incentive program or making deals M&A.
Selling shares back to the market by a company often creates pressure on quotes., the price of securities falls, shareholder returns are declining. However, there are situations, when exactly this option for managing shares is the most effective. For instance, if necessary, increase the liquidity of securities or free-float.
Difference between buyback and dividends
Buyback in the vast majority of cases is positive for the dynamics of shares, the only difference is, how strong will his influence be. From this point of view, share buyback is the same way of rewarding shareholders., as well as dividends, but with its own specifics. The most important point here is the effectiveness of buyback versus dividends in terms of profitability..
Share buyback is most effective, when purchased securities are undervalued by the market. I.e, when the acquisition of shares will be more profitable for shareholders due to an increase in market value, than paying dividends or reinvesting profits.
If the company's shares are priced fairly relative to competitors or more expensive, then as the price rises thanks to buyback, more and more people will appear willing to sell securities. In this case, the supply overhang will grow., and the effectiveness of the buyback will fall.
Besides, other things being equal, long-distance buyback may be more profitable in comparison with dividends due to taxes. Amount, redemption, not taxed - unlike 13% on dividends. It's worth saying here, what 13% you still have to pay from the final financial result, however all that time, until the shareholder sells the share, buyback works like a tax-free dividend reinvestment.
Another significant point - as a rule, companies do not disclose the principles of redemption of shares from the market and independently decide, when, in what volumes and how to buy paper. For an ordinary investor, this creates uncertainty regarding the support of quotations from the buyback at one point or another..
Besides, companies can sometimes suspend share buybacks, while dividend cuts or cancellations are perceived by investors as painful, therefore, companies take such measures much less often.
Summing up
Buyback is a tool for rewarding shareholders along with paying dividends. Most often, the most attractive type of share buyback for shareholders is from the open market. Tender buyback and Dutch auction can also have a positive impact on securities, but it all depends on the premium of the buyout price to the market.
After the buyback, the company forms a treasury stake. From the point of view of profitability for shareholders, the most profitable use of it is cancellation of shares.. Also positive options: launch of a management incentive program, execution of transactions M&A. Selling a treasury stake back to the market most often has a negative impact on the dynamics of securities in the short term.. However, this can increase free-float and liquidity., which in the longer term can become a good driver for quotes.
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