Financial Strategy And Significance Of Buyback Shares Finance Essay
The present paper talks about the significance of buyback shares. This has changed over the year especially after its inception in the year 1998 in FTSE. The initial reason was to dilute the shareholding for companies and hence getting listed on the stock market. It is definitely a risky affair these days as it does have an association with the dividend given by a company. The paper shows that in spite of noble thoughts of the company, there are times when the shareholders perceive it as the beginning of the company to get delisted from the stock exchange. Also, nowadays, buy back is generally preferred when there is surplus earning in the company. Over the last decade a lot of foreign involvement has come up with the use of buy back of shares. It is seen in the paper that if a company has about 15% of its shared under the buyback category, it would be safe. If the ration goes beyond 100%, it is highly unsafe and needs resurrection in the financial policies. The company that has been used to exemplify the use of buy back here is, Galaxo Smith and Kline. The case study shows that the company has about 25% of its shares in the buyback category which puts in a comfortable position. Buyback (Anon, 2010)
Introduction
Share buy Back is one of the most commonly used tools used by the companies to return wealth to its share holders apart from stock price appreciations and dividends. Another reason of buy back is to create confidence. When an organization (Firm) spends a huge amount of money to purchase its own shares it shows the confidence of management. Improvement in the financial ratios is another motive to do so apart from saving of taxes.
The aim of this study is to examine the effects of “Buying back of shares by companies as a financial strategy with special reference to its effect on gearing ratio”. Galaxo Smith Kline has been taken as case study. Buy back is considered to be a financial activity of a company opposite to public issue of shares. In buying back the company offers to purchase its shares from the investors at a specific prize. It may be optional or binding. This has following effects:-
This reduces the number of shares of the company in the market thus enhancing the value of remaining shares.
It is a sign of optimism of the management for the future of the firm and consider that the current “ Share price is undervalued”
It puts unused cash to use.
Raises earning per share.
It enhances the internal control of the company.
It obtains stock for pension plans and employees stock option plans.
This helps the firms in distributing the cash how accumulates during the financial crisis
Causes of Buyback
Accumulation of Unused Cash.
Tax Gain
Market Perception
Exit Option
Monitoring Of Accounts And Legal Control
To Show Good Financial Result
To Increase The Stake Of Promoters.
Siddhartha (2005), states that buying back of share repurchase is becoming more and more popular among companies because of its total flexibility with them. Moreover it is supported to be the most tax efficient method for companies return cash to share holders i.e. almost none when compared with 15% tax on dividend income.
Methods of Buying Back
DUTCH auction method:-In this method a company states a range of prices at which it is ready to by and accept the bid. It is the lowest prize possible at which a company can buy the desired numbers of shares.
Tender offer method: In this method the share holders are given proposal to sale a part or whole of their shares usually at a higher rate than market.
Book building process
3. Open market purchase over a long period.
4. Private negotiations. Buy Back of Securities (Anon, 2009)
Determination of Buy Back Prices
Average closing price immediately before the offer of buy back: In this method the share price is set at a mark up over the average price of last 12 to 18 months.
Effect on Stock Exchange
Buy Back