Reasons for Buyback
What are the reasons for buyback of shares?
1.Buyback helps to reduce the threat by the shareholders who may be looking for a controlling stake in the company.
2.The company may also use buyback for the de-listing of shares.
3. Companies may go for buyback in poor market conditions to support falling prices, as they believe the share price is undervalued.
4.When the company has abundant idle cash & there are not enough growth opportunities available.
Advantages of buyback
1.It prevents a decline in the value of a share by reducing the supply of the Shares in the market and also due to the reduction in outstanding shares the Earnings per Share (EPS) of the company improves.
2.It is also used strategically by the management to show its confidence in the company and to send a message that the stock is undervalued.
3.Helps the company use its excess cash lying idle due to lack of opportunities.
4.If promoters do not participate in the buyback process, it increases their holdings, thus strengthening their hold over the company & preventing potential takeovers by rivals.
5.When a company pays dividends, all shareholders receive cash as per their shareholding, whether they need it or not. However, shareholders are free to decide if they want to tender their shares in the buyback process.
Disadvantages of buyback
Buybacks may indicate a lack of profitable opportunities for the company to invest in, which may send a bad signal to long-term investors looking for capital appreciation.
The entire process is time-consuming and requires a lot of disclosures to the stock exchanges and approvals from regulatory bodies. It also becomes an expensive affair for the company as it is usually done at a premium to the market price.