Managing Shareholder Value

In company’s announcement,Management/Board will usually use the share-buyback strategy to inform its shareholder that it is a means of maximizing shareholder value.

So let’s look at some basics of Share buyback to understand the rationale of such announcement:

What is Share buyback:
Basically, it is the purchase by a listed company of its own shares.
In what way(s) can we institute a Share buyback scheme:
Can be using the following ways:

• The most common is when a company buys shares on the open market. A company has to get approval from its shareholders during the Annual General Meeting in order to buy back its shares.

• Another one which is less common, is that a company can announce a tender offer. This involves all shareholders submitting a price they would be prepared to accept for their shares. In both instances once the company buy backs the shares it will cancel them, so they will cease to exist. Therefore a company cannot flog the same shares back onto the market at a later date.

Is share buyback something new in the market?
Share buyback has been here for long time. However, it’s popularity catapulted over the past twenty years. In the United States alone, corporate expenditures on share buybacks as a percentage of earnings are ten times higher today than there were in 1980. In the late 1990s, for the first time companies spent more money repurchasing their shares than on paying dividends. Share buybacks are also flourishing globally. In recent years, countries like the U.K. and Canada have seen an increase in activity while other nations that previous prohibited buybacks, including Germany and Japan, have adopted provisions to make them acceptable.

Why do or what are the reasons for companies to buy back their shares?

• To deploy excess cash flow and return it to shareholders as the management deem that they are unable to utilize these surplus cash to earn higher than the company’s cost of capital. In recent years, it is interesting to note that the fund managers or investment institutions favor companies to return their surplus cash rather than sitting on it just in case they might need it for future acquisitions. The institutions believe that it should be their decision, and not the company’s, to hold part of their assets in cash, (more…)