Share buybacks?

maxie014

Two companys merge.
The share price gradually goes down the proverbial sh****er to half price.
Company sells a subsidiary.
Announces a share buyback.
Buys shares back off shareholders at the new low value.
Share price goes back up.
Or am i missing something hmmmmmm.

Masomnia

If you're a shareholder it's in your interest that the price is lower during the buyback.

Linton

if the company can buy shares so can everyone else. Therefore the price will rise as soon as the buyback is announced.

Tom99

Won't the price rise only if the shares are undervalued?
If the company spends £1m buying its own shares then the price will only rise if the value/worth of those shares is more than £1m?

le_loup

My view of share buybacks is that they promote the interests of the managers of the company only.
Get paid in shares; don't improve company performance; share price remains static or drops: get company to buys shares; share value increases; pay goes up; run to bank; retire in Bermuda.
Great stuff if you can get it.

Linton

Tom99 wrote: »

Won't the price rise only if the shares are undervalued?
If the company spends £1m buying its own shares then the price will only rise if the value/worth of those shares is more than £1m?

If the shares is believed to be valued correctly then the company buying and destroying some should increase the price so that the market cap returns to its former value. If the market believes this will happen it will ensure that the price will increases to near that value by the time of the buyback. In principle it should be no different to a dividend of the same value.


Buy backs are relatively uncommon in the UK but are popular in the US, I believe for tax reasons.

Tom99

Linton wrote: »

If the shares is believed to be valued correctly then the company buying and destroying some should increase the price so that the market cap returns to its former value. If the market believes this will happen it will ensure that the price will increases to near that value by the time of the buyback. In principle it should be no different to a dividend of the same value.

[FONT=Verdana, sans-serif]Surely it is only if the company is undervalued rather than correctly valued?[/FONT]
[FONT=Verdana, sans-serif]For example, a company has 10m shares issued, current price £1m = Market Cap £10m.[/FONT]
[FONT=Verdana, sans-serif]The company has £1m surplus cash and decides to buy 1m shares at £1 = £1m.[/FONT]
[FONT=Verdana, sans-serif]If the company was correctly valued the Market Cap would drop to £9m and each remaining share would still be worth £1.[/FONT]
[FONT=Verdana, sans-serif]Its only if the market perception was that the underlying business was worth more that £9m and the £1m cash worth less than £1m that the share price would increase.[/FONT]
[FONT=Verdana, sans-serif]Say for example the underlying value of the business was £9.2m not £9m, then after buying back 1m shares at £1 each remaining share would be worth £1.02.[/FONT]

Thrugelmir

Which company are you referring to?

Linton

Tom99 wrote: »

[FONT=Verdana, sans-serif]Surely it is only if the company is undervalued rather than correctly valued?[/FONT]
[FONT=Verdana, sans-serif]For example, a company has 10m shares issued, current price £1m = Market Cap £10m.[/FONT]
[FONT=Verdana, sans-serif]The company has £1m surplus cash and decides to buy 1m shares at £1 = £1m.[/FONT]
[FONT=Verdana, sans-serif]If the company was correctly valued the Market Cap would drop to £9m and each remaining share would still be worth £1.[/FONT]
[FONT=Verdana, sans-serif]Its only if the market perception was that the underlying business was worth more that £9m and the £1m cash worth less than £1m that the share price would increase.[/FONT]
[FONT=Verdana, sans-serif]Say for example the underlying value of the business was £9.2m not £9m, then after buying back 1m shares at £1 each remaining share would be worth £1.02.[/FONT]

The same argument also applies to dividends.


The valuation that matters is how much potential investors are prepared to pay now to own the future value. The current net assets may well be just a relatively small % of this and of little relevence to an investor's assesment. For example Apple has a price to book ratio of around 9. Glaxo 17, BAE about 3 to take three companies I chose at random. So in Apple's case a 10% share buyback should theoretically only cause about 1% loss of value.

short_butt_sweet

i suspect the OP is alluding to the standard life aberdeen return of capital. this differs from a literal share buyback: in this case, it doesn't matter what share price the return of capital is made at, because all shareholders are being treated the same. if you owned 1% of the company before the ROC, you will get 1% of the cash being returned, and still own 1% of the remaining shares in the company afterwards. so the price of the ROC doesn't matter (except that it can affect capital gain tax calculations).

in a (literal) share buyback, where the company goes into the market and buys shares from whoever will sell, not from all shareholders proportionately, the price of the buyback does matter. because if you aren't selling, you get 0% of the cash being returned, and if your shareholding was 1% before, it now becomes a bit more than 1%. so you would prefer the buyback to happen at as low a price as possible. (and if you are selling, you'd prefer the price of the buyback to be as high as possible.)

short_butt_sweet

Linton wrote: »

The valuation that matters is how much potential investors are prepared to pay now to own the future value. The current net assets may well be just a relatively small % of this and of little relevence to an investor's assesment. For example Apple has a price to book ratio of around 9. Glaxo 17, BAE about 3 to take three companies I chose at random. So in Apple's case a 10% share buyback should theoretically only cause about 1% loss of value.

that doesn't make sense.

the standard way to value the company is by doing a discounted cash flow calculation for the business, and then adjusting for net cash currently held by the company. which implies that each $1 of cash held by the company increases its market capitalization by $1.