Introduction
If you've spent some time trading, you might have come across the term "buyback" quite often. Buyback is an increasingly popular strategy companies use in India and across the world. Through a buyback program, a company repurchases its shares from the stock market. There could be several reasons for this. Some common motivations include boosting share prices, utilising surplus cash, and reducing outstanding shares in the market. As the buyback process increases the value of shares, you benefit as the shareholder of the company. What else does the buyback impact, and how should you behave as an investor? Get the answers in this handy blog.
Share buybacks: The process
Share buybacks are carried out through two primary methods – tender offers and open market buybacks. These methods aim to achieve similar outcomes, but their execution and impact on investors differ.
· Tender offer
The company offers to repurchase a specific number of shares at a predetermined price through a tender offer. The price is usually higher than the market value. As a shareholder in the company, you can tender or sell your shares to the company through this offer. In return, you typically receive a premium in your account.
· Open market buyback
In an open market buyback, the company purchases shares directly from the open market over an extended period. This duration is mentioned on the buyback offer and lasts for months. The process is similar to purchasing shares as a regular investor. The company may appoint a designated broker for the task. The shares are purchased at market-driven prices as opposed to fixed prices.
Successful buyback case studies
Studying historical success stories of buybacks gives you a framework to understand the impacts of buybacks on your investments. Here are some Indian companies that successfully implemented share buybacks and delivered significant value to their investors.
· Reliance Industries Limited
Reliance Industries Limited executed its buyback program in January 2020 with a public announcement. The company proposed to repurchase up to 12 crore equity shares at a maximum price of ₹870 per share. The total buyback was capped at ₹10,440 crores, which represented about 7.22% of the company's total paid-up capital as of 31st March 2011. The buyback took place through the open market purchase. Following the buyback announcement, RIL's stock saw a noticeable increase in value. The investors positively responded to the buyback as the goal was to go debt-free for Reliance while increasing the EPS.
· Tata Consultancy Services (TCS)
TCS proposed a buyback offer of up to 5,61,40,351 equity shares on 20th February 2017. This amounted to ₹16,000 crores at a price of ₹2.850 per share. It represented a premium of 13.7% over the market price when the announcement was made. The buyback was executed through a tender offer to buy from existing shareholders. The buyback was well-received with substantial participation from investors. This buyback was TCS' first share repurchase action. Since then, TCS has conducted multiple buybacks, totalling ₹66,000 crores between 2017 to 2022.
· Infosys
In 2017, Infosys announced a ₹9,200 crores buyback, which was announced on 11 October 2017. The It giant offered to buy up to 11,30,43,478 fully paid-up shares at ₹1,150 per equity share. The objective was to increase surplus cash for shareholders and improve returns on equity. The buyback was executed as a tender offer and purchased from the existing shareholders, on a proportionate basis. After the closing of the tendering period on 14th December 2017, Infosys repurchased the proposed shares with the use of a total ₹13,000 crores. The buyback was a success, with the bids exceeding 4,9989 times the maximum number of shares proposed to be bought back.
Investor strategies for navigating buybacks
While share buybacks present a lucrative opportunity, they also come with risks. You can navigate such risks and benefit from the buyback programs through these strategies:
· Evaluate the intent to understand if it's a short-term fix or a long-term outlook.
· Look beyond the buyback and analyse the company's financial health, growth potential, and future market opportunities.
· Understand the short-term and long-term capital gains tax you incur on the buyback.
· Consider the timing of the buyback and decide if you want to sell or retain your shares post-buyback.
Conclusion
With share buybacks, companies make a strategic move to optimise their capital structure and enhance shareholder value. As an investor, you can assess the benefits of such programs to make the right choice. Consider the case studies discussed in this blog to understand how the process should go and understand the company buyback offer thoroughly. Also, employ investor strategies to navigate buybacks effectively. Take your time with the process to capitalise on the gains while mitigating the associated risks. If done right, buybacks offer great value for your investment.
Financial Calculators: SIP Calculator | SWP Calculator | Compound Interest Calculator | EMI Calculator | FD Calculator | Retirement Calculator | Option Value Calculator | Inflation Calculator | Lumpsum Calculator
Popular Stocks: ICICI Bank Share Price | HDFC Bank Share Price | CDSL Share Price | UPL Share Price | TCS Share Price | BHEL Share Price | Trident Share Price | IRFC Share Price | Adani Power Share Price