Buy Back - Stock Repurchase Program

Definition of Buy back

Buy back is the process of a company repurchasing its issued shares.  This can come in the form of repurchasing stocks and bonds.  This buy back effort reduces the number of outstanding shares and gives the remaining shareholders a larger stake of ownership in the company.

Why Do Buy backs Occur?

Buy backs occur for a number of reasons.  Many believe that if a company begins to repurchase its shares, it is a sign as that the executives and board of directors believe the company has a bright future ahead.  Conversely, a buy back could be part of a larger strategy for the company to raise its price to earnings ratio, because their will be less stock in float.  This could give the temporary appearance that the stock is undervalued.

How are Buy backs Executed?

Buy backs are a pretty straightforward process and are executed in one of two methods:

Extend an offer to Shareholders

Shareholders are presented an offer to sell their shares back at a set price.  This offer is above the current market value, but must be executed within a specific time frame. 

Buy the Shares on the Open Market

The second option for a buy back is for the company to buy the shares back on the open market.  This process has to be followed with strict guidelines to ensure the board does not authorize the repurchase of shares at lofty levels.

Recent buy back Initiatives

With the credit crisis of 2008, a number of governments have spearheaded buy back programs that were heavily linked to credit default swaps, in an effort to bring stability to this unregulated market.  An example of this can be seen where the Hong Kong bank executed a buy back of mini bonds issued by Lehman Brothers.  The goal of this program is to recoup some of the lossess incurred by the average investor in China that took part of these "safe bets".

Lehman Buy Back

Tim Ord
Ord Oracle

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