Share Buy Back - What Is The Purpose?

The Concept of Share Buyback!!

In corporate finance, share buybacks are an important concept, making it an approach that we, as investors, should investigate critically.  

Quite often, companies implement different strategies that help in enhancing shareholder value and ultimately optimizing the capital structure. One such strategy, which is share repurchase or buyback, has gained considerable momentum.  But let us first dive into the topic and understand more about the process.

In the case of a buyback, the company takes back some of its shares from the market. Thus, the business basically invests in itself when it thinks that the stocks of the company are trading at a price that is lower than their intrinsic value. In other words, the shares are undervalued. On the other hand, since the outstanding shares in the market is reduced, the investors become owners of a larger proportion of shares. This provides more return to the investors. Typically, companies conduct share repurchases at a price that is much above the current market price of the stock.

Therefore, if you return your existing shares to the company, it is similar to selling them off in the market but at a considerably higher profit, with zero risk. However, the funding for the buyback may come from a loan or cash-in-hand with the company. It may also use cash flow from operations. 

Methods..

Buyback can be done either through a tender offer or through an open market offer. Here is a short explanation of both methods:

1. Tender offer: In this method, the shareholders who already own shares of that company may accept the offer and, in exchange for the cash that is being given to them, tender their shares. This is done according to the buyback ratio that is prescribed by the company. Since the price offered is higher than the current market price, this premium amount acts as an encouragement to shareholders to tender their shares. Thus, within a given period, the shareholders have to submit the shares.
2. Open market offer: Here, the shareholder can participate in the offer for buyback with the help of a stockbroker, till the date the option is open for participation. This is done in the secondary market. 

However, good companies offering stock buyback opportunities at a very high price typically receive bids beyond their actual number of shares they plan to buy. So, even though you may submit your bid on time, you may not always get the chance to take advantage of the offer.

Purpose..

1. Extra cash return - Now, one purpose of the buyback of shares can be returning excess cash with the company to the shareholders. When a company wants to raise money, it will issue shares to the general public. However, the case may also be the opposite, i.e., the company has a lot of excess funds with it due to high profits or reserves. In such cases, the company may want to give some of it back to the shareholders to keep them happy and satisfied. A few ways to do so is to declare a good dividend or a share buyback. Therefore, through buyback, the company gives its shareholders the chance to sell the shares and earn a guaranteed return without risk. 
2. Capital structure enhancement - This enhances shareholder value by increasing its earnings per share (EPS), boosting the stock prices, which finally helps the company restructure. Since the number of outstanding shares is reduced, EPS increases, making the shares more valuable and the business more financially sound. This, in turn, brings up the stock prices.
3. Signal of growth potential - A company may also use share repurchases to inform shareholders that its shares may be undervalued and that the company is confident in its future growth potential. By offering to buy back the shares at a higher price, the company increases shareholder confidence again. It communicates to the shareholders that it has full faith in the long-term value of the business.
4. Tax efficient - This method of share repurchase also provides a tax-efficient return because dividends are taxed at a higher rate than repurchases. Therefore, the capital gains tax is lower in this case, making it an attractive method for shareholder return. Shareholders find it a more lucrative option.

Example: 

Innovate Inc. is a U.S.-based tech company, holding excess cash of $10 million. Thus, with a stock price is $50 per share, and outstanding shares of 10 million, its market capitalization is $500 million. 

The company initiates a share buyback program, where it repurchases 200,000 shares from the open market, giving the respective shareholders, who sell their shares, cash at the market price of $50 per share. This reduces the outstanding shares to 9.8 million. Now, since the net income is divided among fewer shares, the company’s earnings per share (EPS) increases.

The above situation can lead to a higher stock price, improved metrics and better confidence of shareholders in the business. Innovate Inc. uses the buyback to reward its shareholders while optimizing its capital structure, ensuring its financial strategy aligns with creating long-term value.

Some most recent stock buyback examples include the following:

Banco Santander: The company, on May 5, 2025, announced its intention to give back to the shareholders, cash worth €10 billion, through share buybacks for 2025 and 2026. 

Nomura Holdings, Inc.: It also announced, on June 2, 2025, their ongoing share buyback program.

ING Bank: The bank announced that it has completed its share buyback program on June 10, 2025, which is worth €2.0 billion. 

Conclusion:

To conclude, share buyback is when the company repurchases its own shares, reducing the total in the market, which is a way of showing confidence as well as enhancing earnings per share, capital efficiency, and strengthening the company’s position. This is a reward for the shareholders. 

I hope the above example, along with the explanation provided a wholesome view and understanding of the concept. 

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