Buyback – How companies buy back shares
Buyback - buyback of shares by the issuer from their owners. Buyback is widespread all over the world and is popular with large issuers. We find out, why companies do it and how it can help to invest correctly, saving capital from possible losses.
Buyback may be of interest to a shareholder for several reasons:
- Shares are usually bought back at a price, above market;
- Often increases financial performance in relation to share capital;
- Buyouts affect share prices, increasing market demand;
- Buyback is a consequence of the position in the industry and in the company;
- Share buybacks change the structure of a company's assets;
It is important to understand not only the interests of shareholders, but also the issuer. Let's represent a large company, which does not find a market with sufficient potential to invest free funds. Lack of a new direction for development may affect future financial and operational results. As a result, the company's stock quotes are under pressure. Management understands, that the company's shares are undervalued on the stock market. In this case, the purchase becomes a profitable option for investing funds., which lie "dead" weight. This situation often occurs among large companies in an emerging market with high competition..
The benefit of the company can be associated not only with investing its own funds. The reason for the buyback of shares may be protection from a hostile takeover, desire to save on taxes and increase the market value of shares.
You can buy shares from the stock exchange using the following methods:
- Negotiable acquisition of shares on the open market;
- Tender acquisition of shares
- Tender acquisition by the type of "Dutch" auction.
Open market acquisition
This method is most often used by companies in comparison with other types of buyback and has several features.:
- Purchase procedure for shares. Issuer, its affiliate or a hired agent (broker), like any other financier, buys shares on the stock exchange. These can be everyday or recurring purchases.. With all this, they do not advertise their activity on the trading platform - the size, the cost and time of the agreements are not announced. This is made for the purpose, so that those present on the market could not speculate on the circulating redemption of shares. Purchase volumes and prices can be placed several days after the agreements are made.
- Program duration. It fluctuates from several months to a couple of years - announced by the company in advance, but can then be extended or curtailed at the discretion of the issuer.
- Acquisition size. Installed by the company, there are no formal barriers. Possibly nominated in the number of shares, currency equivalent, share of the authorized capital.
- Acquisition site. Buying up of shares can take place on different platforms, where is the company represented. What is the total amount of the acquisition will be on this or that site?, unclear. Often there is no big difference between the place of negotiable acquisition due to the stay of arbitrageurs.
- Arbitrageurs - present on the market, earning?? on the difference in the value of assets at different sites. For example, if the organization's securities are traded on the MICEX cheaper, than on the LSE, then the arbitrator can purchase securities in the Russian Federation and sell in the capital of Great Britain.
- Type of shares. Securities can be redeemed in the form of shares or depository receipts at the discretion of the company.
Buyback on the open market, usually, has a more positive effect on the market value of shares, for the reason that, that the company, through the acquisition for a certain period of time, makes additional demand for securities. Eventually, the balance of market supply and demand shifts, stimulating stocks to grow - this is the benefit of buyback from the open market for stock holders.
It should be noted, that buyback from the open market is a flexible tool for the company. The Issuer, at its sole discretion, may suspend, minimize or increase the implementation period of a circulating share acquisition project, depending on market criteria. Together with a large impact on price dynamics, this leads to the highest popularity of this type of buyback..
18 Martha 2021 G. MTS Board of Governors supported the acquisition of its common shares and ADR in total size, not superior 15 billion rubles. The circulating share purchase program entered into force 30 Martha 2021 G. with a term of action to the end 2021 G.
Shares are redeemed by the controlled organization of MTS - Bastion LLC every day. Along with this, the share of securities within the buyback is redeemed directly from the largest shareholder of MTS - AFK Sistema.
The period of implementation of the turnaround acquisition project - from 17 november 2020 G. on 31 December 2021 G. inclusive. Total amount of money, which were directed to the purchase of shares - less 5 billion rubles.
The acquisition of shares is carried out by the controlled organization Avitrans LLC from time to time.
Tender acquisition of shares
A tender purchase of shares implies the acquisition of the entire size of shares at a certain moment. How does it happen:
- The company declares its desire to buy a certain number of shares at the previously announced value within the discussed period.
- To take part in the circulating buyout, the owners of shares must submit an application - applications are accepted before the specified date for more than 30 days.
- If the total amount of shares offered for purchase exceeds the largest amount of buyback, then the securities are purchased from the shareholders in proportion to. In other words, if within the buyback the company was going to buy 50 thousand. Shares, and the owners of the shares presented 100 thousand, then only fifty percent of the declared securities will be purchased from everyone who took part in the buyback.
- Shareholders receive funds for repurchased shares within a period of less than 15 days.
What are the individualities?. In-1-x, almost everything depends on the value of the share as part of the circulating acquisition, specifically from its difference in the relative market price. If the buyback is announced with a premium to the market, then one can expect a positive reaction from shares - financiers can take securities in order to present them for acquisition.
2-oh moment - more often than not, the size of the shares presented for the acquisition 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.
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%.
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.
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.
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.
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.
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.