Description
This is a presentation about Buyback of shares.
Definition
A stock buyback, also known as a "share repurchase", is a company's buying back its shares from the marketplace. You can think of a buyback as a company investing in itself, or using its cash to buy its own shares.
History
Prior to 1998 buybacks were not allowed in India. In the 1970’s period, if MNC’s wanted to continue doing their business in India, they could do so only by diluting their shareholding and getting listed on the exchange. They were thus forced to go public.
The buyback ordinance was introduced by the Government of India (GOI) on October 31, 1998. There was Insertion of new sections 77A, 77AA and 77B in the Companies Law which allowed buyback. The major objective of the buyback ordinance was to revive the capital markets and protect companies from hostile takeover bids.
Contd…
Several MNC’s like Philips India Limited, Cadbury India, Otis Elevators, Carrier Aircon, Reckitt Benkiser etc. announced offers to buyback the shares of its Indian subsidiary under SEBI (SAST).
This provided a much needed exit option for shareholders in depressed market conditions.
Objectives
Unused Cash Tax Gains Market perception Exit option Increase promoter's stake
Escape monitoring of accounts and legal controls
Show rosier financials Nationalisation
Methods of BuyBack
Open Market
Dutch Auction
Fixed Price Tender Offer
Advantages
Increase confidence in management Enhances shareholders value Higher Share Price Reduce takeover chances Increase ROE Psychological Effect Excellent Tool For Financial Reengineering Tax Implication
SHAREHOLDING PATTERN CHANGES
IMPROVEMENT IN THE FINANCIAL RATIOS OF THE COMPANY
Tax Benefits
DRAWBACKS OF BUYBACK
?
The announcement of a share buyback indicates that managers are so confident of their company's prospects that they believe the best investment it can make is in its own shares.
?
If only it were that simple!!!!!!!!
Participation of Manager in Buyback
The credibility of a signal is seriously weakened if the company's managers choose to participate in the buyback themselves.
Sending Negative Signal
HP Case
From November 1998 through October 2000, for instance, the computer giant HewlettPackard spent $8.2 billion to buy back 128 million of its shares.
According to HP executives, the aim was to make opportunistic purchases of HP stock at attractive prices—in other words, at prices they felt undervalued the company.
Contd..
The buyback signal was completely drowned out by a rapid succession of other move :–
• An aborted acquisition • A protracted business restructuring • Slipping financial results • A decay in the general profitability of key markets.
By last January, HP's shares were trading at around half the average $64 per share paid to repurchase the stock.
Backfire
IBM Case
?
IBM, for instance, has seen no clear benefit from the $27 billion it spent on buybacks between 1995 and 2000 because the cash payout only heightened analysts' concerns over the company's ability to continue coming up with new products and services.
CASE: INDIAN RAYON
Intro
In 1999, AV Birla group company Indian Rayon announced buying back up to one-fourth (25%) of its equity share capital at a price ranging between Rs 75 and Rs 85 per share. After buyback; the Birlas' stake in Indian Rayon will go up to 28.7 per cent from the present 21.5 per cent. If the buyback offer is fully subscribed to, it will result in an outflow of Rs 127-144 crores approximately, depending on the final price.
Reasons for buyback
The reason given by the management for the buyback was that Indian Rayon is working at below capacity and there were no major capital expenditure plans at that time.
Hence the best way to add value to shareholders is to return the funds to them.
Result
Reasons for Failure
Sale of assets like cement unit to Grasim had led to huge cash surplus from which the company wanted to buy back its shares but the shareholders decided to hold on to their shares as the offer was extremely unattractive.
The company has seen its market capitalisation falling to Rs.455 crores as against Rs.1397 crores from early 1999.
Contd..
In the last three years they have seen the company losing its crucial assets.
In the last few months the company's scrip has crashed from Rs.207 to Rs.67.
The buybacks raised doubts over whether these have been pursued with surplus cash and enhance valuation or to indirectly raise the promoter‘s stake
doc_747379233.pptx
This is a presentation about Buyback of shares.
Definition
A stock buyback, also known as a "share repurchase", is a company's buying back its shares from the marketplace. You can think of a buyback as a company investing in itself, or using its cash to buy its own shares.
History
Prior to 1998 buybacks were not allowed in India. In the 1970’s period, if MNC’s wanted to continue doing their business in India, they could do so only by diluting their shareholding and getting listed on the exchange. They were thus forced to go public.
The buyback ordinance was introduced by the Government of India (GOI) on October 31, 1998. There was Insertion of new sections 77A, 77AA and 77B in the Companies Law which allowed buyback. The major objective of the buyback ordinance was to revive the capital markets and protect companies from hostile takeover bids.
Contd…
Several MNC’s like Philips India Limited, Cadbury India, Otis Elevators, Carrier Aircon, Reckitt Benkiser etc. announced offers to buyback the shares of its Indian subsidiary under SEBI (SAST).
This provided a much needed exit option for shareholders in depressed market conditions.
Objectives
Unused Cash Tax Gains Market perception Exit option Increase promoter's stake
Escape monitoring of accounts and legal controls
Show rosier financials Nationalisation
Methods of BuyBack
Open Market
Dutch Auction
Fixed Price Tender Offer
Advantages
Increase confidence in management Enhances shareholders value Higher Share Price Reduce takeover chances Increase ROE Psychological Effect Excellent Tool For Financial Reengineering Tax Implication
SHAREHOLDING PATTERN CHANGES
IMPROVEMENT IN THE FINANCIAL RATIOS OF THE COMPANY
Tax Benefits
DRAWBACKS OF BUYBACK
?
The announcement of a share buyback indicates that managers are so confident of their company's prospects that they believe the best investment it can make is in its own shares.
?
If only it were that simple!!!!!!!!
Participation of Manager in Buyback
The credibility of a signal is seriously weakened if the company's managers choose to participate in the buyback themselves.
Sending Negative Signal
HP Case
From November 1998 through October 2000, for instance, the computer giant HewlettPackard spent $8.2 billion to buy back 128 million of its shares.
According to HP executives, the aim was to make opportunistic purchases of HP stock at attractive prices—in other words, at prices they felt undervalued the company.
Contd..
The buyback signal was completely drowned out by a rapid succession of other move :–
• An aborted acquisition • A protracted business restructuring • Slipping financial results • A decay in the general profitability of key markets.
By last January, HP's shares were trading at around half the average $64 per share paid to repurchase the stock.
Backfire
IBM Case
?
IBM, for instance, has seen no clear benefit from the $27 billion it spent on buybacks between 1995 and 2000 because the cash payout only heightened analysts' concerns over the company's ability to continue coming up with new products and services.
CASE: INDIAN RAYON
Intro
In 1999, AV Birla group company Indian Rayon announced buying back up to one-fourth (25%) of its equity share capital at a price ranging between Rs 75 and Rs 85 per share. After buyback; the Birlas' stake in Indian Rayon will go up to 28.7 per cent from the present 21.5 per cent. If the buyback offer is fully subscribed to, it will result in an outflow of Rs 127-144 crores approximately, depending on the final price.
Reasons for buyback
The reason given by the management for the buyback was that Indian Rayon is working at below capacity and there were no major capital expenditure plans at that time.
Hence the best way to add value to shareholders is to return the funds to them.
Result
Reasons for Failure
Sale of assets like cement unit to Grasim had led to huge cash surplus from which the company wanted to buy back its shares but the shareholders decided to hold on to their shares as the offer was extremely unattractive.
The company has seen its market capitalisation falling to Rs.455 crores as against Rs.1397 crores from early 1999.
Contd..
In the last three years they have seen the company losing its crucial assets.
In the last few months the company's scrip has crashed from Rs.207 to Rs.67.
The buybacks raised doubts over whether these have been pursued with surplus cash and enhance valuation or to indirectly raise the promoter‘s stake
doc_747379233.pptx