Published Oct 17, 2024
It is a familiar term, and you may often hear about companies buying back their shares from the market. This means that the company repurchases its own shares from existing shareholders, typically offering a price higher than the prevailing market value.
A share buyback is primarily aimed at improving stock valuation. By reducing the number of outstanding shares, metrics such as Earnings Per Share (EPS) improve, which often leads to an increase in the stock price.
Buybacks are also considered a more tax-efficient way to distribute wealth to shareholders compared to dividends, as dividends are subject to taxation, whereas buybacks typically are not.
Shareholders who sell their shares to the company during a buyback benefit from the premium paid above the current market price.
From the company’s perspective, a buyback can lead to an increase in the promoter’s holding, further enhancing the company’s valuation.
A company can conduct a share buyback through two methods:
In a tender offer, the company proposes to purchase a specific number of shares at a predetermined price directly from its shareholders. The offer remains valid until a declared expiration date, after which it is no longer applicable. This type of transaction typically occurs off-market.
In the open market option, the company purchases a number of shares equal to or less than the announced quantity. However, there is no obligation to buy the entire declared amount. The buyback can be conducted up to a predetermined maximum price, and the process usually continues for up to a year.
The primary objective of this method is to acquire the maximum number of shares at the lowest possible price, while staying within the overall announced limit. This strategy aims to maximize value for the remaining shareholders.
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