Global Diamond Exchange, Inc. (GBDX)

[starfire]

This article refers to share repurchases generally from a U.S. perspective

In the United States and some other countries, corporations can buy back their own stock in a share repurchase, also known as a stock repurchase. There has been a meteoric rise in the use of share repurchases in the U.S. in the past twenty years, from $5b in 1980 to $349b in 2005.[1] A share repurchase distributes cash to existing shareholders in exchange for a fraction of the firm's outstanding equity. That is, cash is exchanged for a reduction in the number of shares outstanding. The firm either retires the shares or keeps them as treasury stock, available for re-issuance. Under U.S. corporate law there are five primary methods of stock repurchase: open market, private negotiations, two variants of self-tender repurchase including a fixed price tender offer and a Dutch auction, and repurchase put rights.

Contents [hide]
1 Open market share repurchases
2 Fixed price tender offer repurchases
3 Dutch auction share repurchases
4 Notes



[edit] Open market share repurchases
The most common share repurchase method in the United States is the open-market stock repurchase, representing almost 95% of all repurchases. A firm may or may not announce that it will repurchase some shares in the open market from time to time as market conditions dictate and maintains the option of deciding whether, when, and how much to repurchase. Open market repurchases can span months or even years. There are, however, daily buy-back limits which restrict the amount of stock that can be bought over a particular time interval.


[edit] Fixed price tender offer repurchases
Prior to 1981, all tender offer repurchases were executed using a fixed price tender offer. This offer specifies in advance a single purchase price, the number of shares sought, and the duration of the offer, with public disclosure required. The offer may be made conditional upon receiving tenders of a minimum number of shares, and it may permit withdrawal of tendered shares prior to the offer's expiration date. Shareholders decide whether or not to participate, and if so, the number of shares to tender to the firm at the specified price. Frequently, officers and directors are precluded from participating in the tender offer. If the number of shares tendered exceeds the number sought, then the company purchases less than all shares tendered at the purchase price on a pro rata basis to all who tendered at the purchase price. If the number of shares tendered is below the number sought, the company may choose to extend the offer’s expiration date.


[edit] Dutch auction share repurchases
The introduction of the Dutch auction share repurchase in 1981 allows an alternative form of tender offer. The first firm to utilize the Dutch auction was Todd Shipyards.[2]. A Dutch auction offer specifies a price range within which the shares will ultimately be purchased. 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 supply curve for the stock.[3] The purchase price is the lowest price that allows the firm to buy the number of shares sought in the offer, and the firm pays that price to all investors who tendered at or below that price. If the number of shares tendered exceeds the number sought, then the company purchases less than all shares tendered at or below the purchase price on a pro rata basis to all who tendered at or below the purchase price. If too few shares are tendered, then the firm either cancels the offer (provided it had been made conditional on a minimum acceptance), or it buys back all tendered shares at the maximum price.


[edit] Notes
^ For evidence of the increased use of share repurchases, see Bagwell, Laurie Simon and John Shoven, "Cash Distributions to Shareholders" 1989, Journal of Economic Perspectives, Vol. 3 No. 3, Summer, 129-140.
^ Bagwell, Laurie Simon, "Dutch Auction Repurchases: An Analysis of Shareholder Heterogeneity" 1992, Journal of Finance, Vol. 47, No. 1, page 73.
^ To understand the Dutch auction bidding and outcome from actual shareholder tendering responses, see Bagwell, Laurie Simon, "Dutch Auction Repurchases: An Analysis of Shareholder Heterogeneity" 1992, Journal of Finance, Vol. 47, No. 1, 71-105.
Retrieved from "http://en.wikipedia.org/wiki/Share_repurchase"

http://en.wikipedia.org/wiki/Share_repurchase