Talk:Share repurchase

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Article says nothing about why a company would want to buy back its own stock. What is the motivation? To keep the stock liquid? To prop up its price? Why prefer stock repurchase over paying dividends? Or do companies do both? Why has stock repurchasing become so popular in recent years? Why? Why? I want to know why! Smithfarm (talk) 20:53, 6 April 2008 (UTC)

I agree that the article needs to give a clear explanation of "why" buybacks occur, and that this is missing. A buyback is proposed because a set of shares are owned by people who think they'll benefit. It is approved because this set is the majority. If the offer is voted for, then some owners sell out because they think they'll benefit, and some others hold for the same reason. In every case, the various owners each have their own circumstances (the execs have stock options and conditional bonuses, and inside knowledge, and the outside investors have neither, for example). These various motivations need to be explained.
From the above it follows that "why should a company want to buy back its own stock?" is a meaningless question as stated (it implies that the "company" is a single person with a single set of beliefs, information, and incentives, which is sometimes emphatically untrue) but it stands for an important question that should be answered.
A distinction that should be made: is the buyback funded by borrowing or by asset reduction? The motivations of different agents may be much different depending on this distinction. In the case of a debt-financed buyout, those who sell out are exiting a company with greatly increased leverage (risk), perhaps hoping that others will decide instead to hold or even buy at the same offer price (perhaps not realizing that their risk has suddenly increased but the share price has momentarily not declined to reflect that). The interests may be different and the motivations (talk) 04:24, 4 January 2015 (UTC)

LOL Seems obvious to me. Directors of companies often get paid in the form of shares. This is said to be so that their 'compensation' is linked to the performance of the company and its long term prospects. Yet they can determine how much of the company's profits can be set aside for repurchase, allowing them to reduce the overal number of publicly traded shares and so causing an increase in the dividend paid per share (which they set). This is a covert way for them to effectively hijack a company by eliminating external shareholders and so gain ever increasing voting power in order to award themselves and their gang members more shares with proportionally larger dividends and ever increasing voting power in order to award themselves..... etc.1812ahill (talk) 03:52, 23 November 2011 (UTC)

I concur with the above comment. That is precisely why I came to this article but did not find the answer. It seems to me that the use of cash reserves to repurchase stock is a poor use of capital if there are alternative investments that could be made. Could someone knowledgeable please elaborate within the article? Rollo44 (talk) 05:05, 8 May 2008 (UTC)

I second, nay third that question. Anyone? Nicoja (talk) 12:04, 30 June 2008 (UTC)

Okay guys, here goes, when companies pay dividends, they have to be really regular about it and have to keep paying dividends to the shareholders and increasing it at a certain rate every year, if they have done so historically. If they stop, the shareholders are not going to be happy and their stock will become unattractive. Its like a commitment. However, when companies want to return capital to shareholders and do it in the form of a share repurchase, they can do it sporadically and whenever they want without any strings attached. Before there used to be a tax incentive to issue dividends than to repurchase shares (has to do with taxes on capital gains being higher than taxes on dividends), but now they have brought down the tax rate on dividends so that incentive is gone. thats why repurchases have become so popular in recent years - its a way for company to return the money to shareholders without promising to keep on doing so in the future.

now motivation for company to repurchase shares: they have SO much cash and earnings and all their investment opportunities and ideas have a negative NPV or are just not good enough to generate significant revenues. so they wont just keep the money in their balance sheet. they will return it to shareholders (make the shareholders(the real owners of the co.) happy) .. that is the real goal of the company: maximizing shareholder wealth. in the short term, you make shareholders richer by giving them dividends and share repurchases and in the long term, you make them rich by doing really well in your business so that your stock price goes up and the value of shareholders therefore goes up.

.................................... Yizhongchen (talk) 14:04, 8 August 2008 (UTC) I agree on some of the comments above. But I disagree that the shareholders are the real owners of the co. . According to Fama and Jensen (1983), Separation of Ownership and Control, no one owns the firm, the firm is just a set of contracts.

Also, I do not agree with the "real" goal of the company. Maximizing shareholder wealth is indeed the goal of the shareholders, but not necessary the goal of bondholders or the manager. Since it is the manager who is making the share repurchase decision, we should look at the manager's motives. According to existent theories, share repurchase is a signaling device for managers, just as dividends. In this signaling theory, managers repurchase stock, telling the shareholders: "The company has extra cash on hand, so we are doing good. Don't worry and do not interrupt our management."

And about the Dutch Auction Share Repurchases, the article said: "Shareholders are invited to tender their stock, if they desire, at any price within the stated range. The firm then compiles these responses, creating a demand curve for the stock." I think it should be supply curve, because it means at a given price how many shares are the existeing shareholders willing to tender or to sell. —Preceding unsigned comment added by Yizhongchen (talkcontribs) 14:00, 8 August 2008 (UTC)

Companies repurchase stock for all kinds of reasons. For example, similar to dividends, stock repurchases shrink the amount of equity in a company by returning to shareholder (who in turn, redeploy that capital elsewhere). As mentioned above, repurchases are remarkably flexible for the company and can be quickly altered depending on the fortunes of the firm. By reducing the sharebase, stock repurchases by definition alter the capital structure of the company (the balance of debt v equity in the company). Off setting the dilutive effects of executive stock options is often argued to be a motivation for repurchasing equity, yet this motive is subset of the capital structure argument. Left unchecked, equity options accumulate equity on the balance sheet. Over time, this alters the balance of equity and debt in company. A final critical reason, the reason so frequently sited for repurchases, is that managers use share repurchases to respond what they perceive as mis-pricing. Stocks which are "cheap" essentially face a high cost of capital. A logical response to high capital costs is to reduce capital goods / investment spending and in turn use that capital to repurchase stock. Numerous academic studies support these motivations, including mispricing. —Preceding unsigned comment added by Daveike (talkcontribs) 01:23, 26 October 2009 (UTC)

Added introductory text explaining the net effects of stock repurchase.[edit]

I added text to the intro to explain the objective effects of a stock repurchase on the company's balance sheet and on its two sets of stockholders at the time of the event.

The topics currently presented are about why the two opposing parties in a buyback (actual sellers and relative buyers) do what they do. Someone new to the topic this can't understood the "why" without first understanding what it is that they, collectively and separately do:

  • collectively disinvest in the company
  • transfer ownership from one set of current owners (who believe the company is a relatively good investment, compared to what they could do with cash) to another set (who think the company is a relatively bad investment, and would like to cash out)

For example, some experts express the belief in articles on the web that a stock buyback expresses management's belief that the company should invest in itself, because it thinks the company is a good investment. If I understand correctly, the opposite is true: a buyback is a disinvestment. (talk) 23:49, 12 December 2014 (UTC)

Reverted my edit, realized it was in error. (talk) 15:50, 13 December 2014 (UTC)

Re "Company repurchasing its own stock"[edit]

It implies that a company can own a portion of itself. Is that possible under the laws of any industrialized country? (talk) 02:31, 16 January 2015 (UTC)

Explanatory example[edit]

I think the introduction might be clearer with an example, one which shows what decisions were made by the three agents in a repurchase transaction (the buyers, the sellers, and the company), why they were made, and what outcomes occurred. What do you think of this text?

"Share repurchase (or stock buyback) is a transaction in which one group of part-owners (the "sellers") of a company sell their share to another group (the "buyers").

"For example, a tool and die company with a good reputation in the region, with 10 M$ in assets (all cash) and no liabilities, is owned by two siblings, Alice and Bob. (The company sold its plant and equipment for 10 M$ in cash when the founder died, because there was disagreement between the heirs about future direction). Alice, who owns half of the company, thinks it has 5 M$ more cash than it needs: it needs to shrink its balance sheet by 5 M$. But she thinks the company is a good investment. Bob has no interest in holding on to his share. He would rather have 5 M$ in cash and give up his ownership.

"In a share repurchase or stock buyback, Bob would sell his half-interest in the company for 5 M$. The company will issue a check for 5 M$ to Bob. Alice will now own 100% of the company, which will now have 5 M$ in assets (all cash) left. Though on paper it is a wash, since she now owns twice as much of a company that is worth on paper half as much, she believes it's a good deal for her. Bob now owns 5 M$ in cash in return for part-ownership of a company that was worth, on paper the same amount. Though the stock buyback was a wash for him on paper, he believes it was a good deal for him.

"Both may be right. Bob's need for cash may be great at this point in his life. Alice's hopes to revive the tool and die company may be worth in the long run much more than the loss in corporate equity to her.

"The company's equity and assets are both now reduced from 10 M$ to 5 M$. In other words, from the economy's point of view, there has been a "Corporate Equity Withdrawal" ("CEW") of 5 M$. Corporate equity has been converted to personal wealth (of Bob). (talk) 03:30, 22 January 2015 (UTC)