Understanding Buy-Backs: A Buy-Back is a strategic decision taken by the company, and under this program a company buys back their own shares from the existing shareholders, which may be usually at a price higher than market price. This is why, buy-backs are also considered as ‘share repurchases’. When the company goes for buy-backs, the number of shares outstanding in the market reduces. The procedure for carrying out a buy-back of shares is done in two broad steps. The shareholders of the company may be provided with a tender offer in which they have the option to submit (or tender) a portion or all of their shares. This has to be done within a certain time frame and is usually at a premium to the current market price so that the investors are ready to give back to the company. Further, the premium primarily provides a profit led investment situation for the investors who tender their shares. Looking at the buy-backs arrangement, the companies can do this in the open market and this can be over an extended period of time. Under the provisions of Corporations Law in Australia, five types of buy-backs are permitted, and these comprise of open market buy-backs or on-market buy-backs, selective or private buy-backs, equal access or tender-offer buy-backs, employee share buy-backs and odd-lot buy-backs.
From the above, we understand that some buy-backs can be beneficial to investors when made at favorable terms. At the same time, companies can benefit from making a better use of funds through such activities without putting the money in the same business at below average rate. They may take a decisive action on buy-backs instead of going for any acquisitions or any other growth related move depending on the shape of the business. Surplus cash resources can be used for buying back equity shares and managing treasure operations. It is also to be noted that share capital reduction can help in strengthening promoter’s control over the company. In addition to such benefits, the buying back of shares sometimes is cost-effective for the company in terms of tax payments and therefore, it sometimes becomes a better choice for distributing earnings than to go for dividends.
Reasons for the buy-back of shares: Since a buy-back is a strategic decision, it has been taken to improve the earnings per share of the company. The buy-back will help to improve return on capital, return on net worth and to increase the long-term shareholder value. The buy-back provides an additional or different exit route to shareholders when the shares are undervalued or are traded with poor volume. Further, the buy-back enhances the consolidation of stake in the company, prevents the company from aggressive takeover bids, to return surplus cash to shareholders and to attain or achieve optimum capital structure. Moreover, during the bearish market, the buy-back of shares gives support to the share price. Through buy-back of shares, the company is able to service the equity more efficiently.
Looking at the current juncture in Australia, many companies are going for buy-back programmes, specially since clouds of Labor’s crackdown on franking credits have started hovering around the market and particularly, income investors.
Overall, buy-backs become important for some companies as well as some investors, and a good example comes from BHP Billiton Limited (ASX: BHP) that has lately flagged to have a share buy-back program and special dividend being paid to shareholders from the funds obtained from sale of onshore US oil and gas assets.
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