Stock buybacks, also known as share repurchases, occur when a company uses its own cash to buy back its outstanding shares from the open market or existing shareholders. Here's how they typically work:
- Decision: The company's board of directors approves a stock buyback program, usually in line with the company's capital allocation strategy. The reasons for a buyback can vary, such as to return cash to shareholders, increase earnings per share, signal confidence in the company's future, or offset dilution from employee stock option plans.
- Authorization: The board authorizes a certain amount of funds for the buyback program. This sets the maximum limit on the total value or number of shares the company can repurchase.
- Announcement: The company publicly announces its intention to execute a buyback. This disclosure can contain information regarding the maximum price, duration, method of execution, and any restrictions, if applicable.
- Execution: The company may choose to buy back shares through various methods:
a. Open Market Purchases: The company purchases shares from the open market through regular trading channels, just like any other investor. This provides liquidity to existing shareholders willing to sell their shares.
b. Tender Offers: The company may make a public offer to purchase a specific number of shares at a specified price, giving shareholders the option to tender their shares within the offer period.
c. Accelerated Share Repurchases (ASR): The company may enter into an agreement with an investment bank to buy back a large block of shares upfront. The investment bank then gradually purchases shares from the market to fulfill the agreement.
d. Private Negotiations: In some cases, the company may negotiate directly with large shareholders, especially institutional investors, to repurchase their shares.
- Reporting and Compliance: Companies are required to disclose their stock repurchases in their financial statements, usually in the notes to the financial statements or as a separate disclosure. These reports include the number of shares repurchased, the average price paid per share, and any changes in the outstanding shares.
It's important to note that while stock buybacks reduce the number of outstanding shares, they do not usually affect the overall ownership percentage of existing shareholders. The repurchased shares can be retired or held as treasury stock, providing flexibility for future use, such as employee stock compensation, future acquisitions, or reissuing them in the open market.