Share Buyback

Share buyback is when a company repurchases its own stock from shareholders.

Corporate stock redemptions are considered by company owners principally for the following reasons:

  1. Peace – to silence a troublesome minority stockholder.
  2. Obligation – for example, one of your executives is leaving the company and he or she has the legal right to require the company to buy the stock he or she purchased previously under a stock option plan.
  3. Mandated buyout – when a court of law orders the company to buy out a minority owner’s shares.
  4. Investment – management might cause the company to buy the stock from willing sellers because they think it will provide a fair return on investment and raise the value of shares that remain.
  5. Stay below the 500-shareholder-threshold: private firms that have 500 or more shareholders can be required to make public filings similar to public companies.

Why would a private company have a share buyback program?

The most fundamental advantage is the reduction of outstanding shares and consequently improvement in key financial metrics, especially the P/E ratio. Other reasons include the tax advantage to shareholders as well as supporting depressed stock prices.

A share buyback is a convenient way for a company to return cash to shareholders. Under a share buyback the company acquires shares in itself from existing shareholders. The shares are then (generally) cancelled and the issued share capital of the company is reduced accordingly.

It’s also a way for shareholders to leave the company.

Why would a company stop share buyback? Primarily to conserve capital – in our case, to prepare for a big expansion.

___________________________________________________________________________________________

Henry, David, “JPMorgan stops stock buybacks, maintains dividend.” Reuters. 21 May 2012.

The Business Owner, “Case Study: Minority Share Buyback.”

Ehow, “Reasons for a Stock Buyback by a Private Company

Lupton Fawcett, “Buyback of Shares (private company)”

Wikipedia, “Share repurchase

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