When a company announces a stock buyback or repurchase
This financial maneuver can be good news for shareholders
First, let’s define stock buybacks, also called repurchases, and see how they work.
The company wants to purchase outstanding shares of its stock, that is shares held by the public outside of its control. It can do this one of two ways:
* It can tender an offer to existing stockholders to buy up to a certain number of shares at a fixed price (usually at a premium over the current market price). There is a time limit on the offer.
* The other way is to buy the shares in the open market over a period. Companies often use this method when the stock’s price is especially depressed.
That’s the two main ways it is done, but why would a company want to buy back its own shares?
The Why of Stock Buybacks
There are several reasons a company may want to buy back shares of its own stock, some of them for the benefit of stockholder,
Here are some of the reasons that a company might do a stock buyback:
* If a company is sitting on a large sum of cash and must decide how to invest it, one of the options is to distribute part of it to shareholders.
Companies can do this either of two ways: as dividends or buy buying up outstanding shares. If the company chooses to buy up shares, stockholders benefit even if they don’t sell by the reduction in outstanding shares.
* Some companies buy back shares as protection against unfriendly takeovers from other companies. By gathering outstanding shares off the open market, the company makes it more difficult for a raider to take control.
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