Buyback

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Buyback

The covering of a short position by purchasing a long contract, usually resulting from the short sale of a commodity. See: Short covering, stock buyback. Also used in the context of bonds. The purchase of corporate bonds by the issuing company at a discount in the open market. Also used in the context of corporate finance. When a firm elects to repurchase some of the shares trading in the market.

Buyback

The act of a publicly-traded company buying its own stock, sometimes at a price well above fair market value. Buyback is not intended to stop trade on its stock. Rather, it is an attempt either to reduce the supply of shares in the market (with the hope of driving up the share price) or to prevent a real or suspected hostile takeover. If a company becomes its own majority or plurality shareholder, it either makes a hostile takeover impossible or more expensive for the acquiring company. A buyback may occur all at once or gradually over time. See also: Antitakeover measure, Self-tender offer.

buyback

A company's repurchase of a portion of its own outstanding shares. The purpose of a buyback may be to acquire a block of stock from an investor who is unfriendly to the target firm's management and is considering taking over the firm. Conversely, a buyback may be an attempt to increase earnings per share by reducing the number of outstanding shares. Regardless of the purpose of a buyback, the result is increased risk for the firm because of reduced equity in the firm's capital structure. Also called stock buyback, stock repurchase plan. See also greenmail, partial redemption, self-tender.
Case Study Corporate stock buybacks generally consist of a company purchasing its shares in the open market or offering shareholders an above-market price for a certain proportion of their holdings. Either method will result in fewer outstanding shares and, hopefully, help support the market price of the firm's stock. In some instances companies sell short put options that commit the companies to buy back shares of their stock at a specified price until a certain date. Companies issuing the puts pocket premiums paid by investors who gain the right to force the company to buy back its own shares. If the stock price remains above the exercise price specified by the puts, option holders choose not to exercise the puts because they have no interest in selling stock at a below-market price. The unexercised options expire, allowing the companies to issue additional puts and pocket additional premiums. In the event puts are exercised, companies purchase shares they intended to purchase in any case. A problem develops when the company's stock price declines dramatically, in which case the company will be forced to repurchase its own shares at a price much higher than the market price. This is exactly what happened to PC maker Dell Computer during the first half of 2001, when the company was forced to repurchase some of its shares for $47 (the exercise price of the puts) at a time the stock was trading on the Nasdaq National Market in the mid-20s. In other words, Dell was being required to pay twice the market price to repurchase its shares because the company had earlier sold put options with strike prices that on the issue date seemed reasonable but later turned out to be substantially higher than the price at which the stock traded in a depressed market. According to an SEC filing, Dell had issued put contracts on 96 million of its own shares at an average exercise price of $44 per share. Unfortunately for Dell, the purchases of its stock at inflated prices came at a time when the firm's cash flow was being squeezed by a weak PC market.

Buyback.

When a company purchases shares of its own publicly traded stock or its own bonds in the open market, it's called a buyback.

The most common reason a company buys back its stock is to make the stock more attractive to investors by increasing its earnings per share. While the actual earnings stay the same, the earnings per share increase because the number of shares has been reduced.

Companies may also buy back shares to pay for acquisitions that are financed with stock swaps or to make stocks available for employee stock option plans.

They may also want to decrease the risk of a hostile takeover by reducing the number of shares for sale, or to discourage short-term trading by driving up the share price.

Companies may buy back bonds when they are selling at discount, which is typically the result of rising interest rates. By paying less than par in the open market, the company is able to reduce the cost of redeeming the bonds when they come due.

buyback

see COUNTERTRADE.
References in periodicals archive ?
(FPH) approved an additional allotment of P5 billion for its buyback program, which is scheduled to run until July 2020.
Though most of those were drowned under the clamour of the Market Support Fund, the second most important demand by the stockholders was the approval of the buyback regulations on priority and enhancement of the limit of 10 per cent on treasury shares.
In his most recent letter to shareholders, Buffett also indicated that buybacks would be a significant part of Berkshire's capital usage going forward.
The government, which holds 65.64 percent stake in the company, stands to gain about Rs 2,640 crore from tendering some of its shares in the buyback programme.
Remember that stock buybacks can be considered another form of dividend payments since it also involves cash distribution from earnings.
Do corporate boards and management approve stock buybacks without expecting a financial reward for this investment?
In the letter to Chairman Clayton, the Senators stated, We write with concerns about the accelerating pace of stock buybacks in U.S.
Dittmar (2000) and Grullon and Michaely (2004) observed companies buyback their shares with numerous motives including to nullify the threat of takeover by competitors, promoting voting power of shareholders and returning surplus cash to shareholders, for injecting buoyancy into undervalue shares (Liao, Ke, & Yu, 2005), increasing earnings per share and many more.
There is a dark side to stock buybacks that most investors don't realize.
With buybacks, a firm can announce one and never fulfill or take longer to do so than originally planned without the same negative reaction as cutting or eliminating a dividend.
Share buybacks are very popular as they provide additional currency to stockholders as compared to dividends (Song, 2001).
Most companies going for buybacks had high promoter stakes - 60-75 per cent.