UPDATED: March 2022
The Different Methods of Share Buyback – Stock repurchases, which are also called share buybacks, happen when a company decides to buy its outstanding shares to reduce the number of shares on the market.
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There are several reasons why companies decide to repurchase shares, and there are generally two parties involved in the transaction, the company and the shareholders.
Interested shareholders are given cash by the company to repurchase the shares, and there are different methods through which this transaction can take place. We are going to be looking at them in detail below.
In general, the most common methods employed by companies for share buybacks are through a fixed tender price offer, open market operations, direct negotiations with shareholders, and a Dutch auction tender offer. Here’s how each method works:
In this method, the company will repurchase shares straight from the market, and the brokers of the company will execute the transactions. Generally, the repurchase of shares takes place over a prolonged period as there are many shares to be acquired. In this method, the company doesn’t have to complete the buyback program and can cancel it at any time. The main advantage here is that it is very economical for a company since it can repurchase shares without paying a premium.
2. Fixed-Price Tender Offer
In this method, the company will make a tender offer to its shareholders to repurchase the shares at a fixed price and on a fixed date. To encourage shareholders to sell their shares, the company will offer a premium on the current price of the shares. Those shareholders who want to sell their shares will then submit the number of shares they want to sell to the company. The fixed-price tender offer allows a company to repurchase shares within a short period.
3. Dutch Auction Tender Offer
In this method, the company offers a tender offer to shareholders for repurchasing their shares and offers multiple prices. The minimum price offered for the shares will be higher than the current market price of the shares. The shareholders will then submit bids for the number of shares they are willing to sell and the minimum price they want to sell them. The company will review the bids from the shareholders and decide on a suitable price to repurchase the shares. The main advantage of the Dutch Auction tender offer is that it allows a company to complete share buybacks in a short period.
4. Direct Negotiation
In this method, the company will approach shareholders directly to repurchase company shares. The price of the share will come with a premium, and the main benefit of direct negotiation is that it allows companies to deal with shareholders directly. However, it should be noted that this can be a time-consuming process.
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Stock Buybacks (Share Repurchases) by Public Corporations (ie. Apple, Tesla, Netflix, Meta (Facebook), Microsoft, etc.)
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