Buybacks limit the number of shares available for purchase, turning a buyer’s market into a seller’s market. They can increase earnings per share and benefit employees, but may not always achieve desired results. Buybacks should occur in a buyer’s market to be effective.
The buyback process is based on the idea of controlling the buyer’s market that is associated with the shares of a particular company. Essentially, buybacks involve the repurchase of outstanding shares as a means of limiting the number of shares that are available for purchase by investors.
As a way to manage the performance of a company’s stock during a soft market, the buyback approach can be very effective. Essentially, a company may choose to engage in a buyback as a means of managing supply over demand. By limiting the number of shares that are available for purchase, it is possible to turn a buyer’s market into a seller’s market, at least for a company. Fewer available shares can create enough interest that demand for the remaining open shares the company can choose to slowly release additional shares to the market, when and how it chooses.
In addition to influencing the buyer’s market, buybacks can also have a positive impact on the company itself. Generally, a buyback will result in putting up cash reserves that aren’t doing anything to work. The effort also generally leads to an increase in earnings per share, which is good for both the company and shareholders. In some cases, recovered shares can also be converted for use in employee share ownership plans or as part of a larger employee pension plan.
However, repurchases do not always result in achieving the desired result. If the presence of a smaller number of shares does not generate interest in the buyer’s market, then it is likely that the value of the shares will not increase appreciably. Instead of becoming a means to increase the productivity of the company’s cash reserves, the buyback attempt simply ties up reserves that could have been used for some other revenue-generating strategy. To be worthwhile, buybacks have to occur in a buyer’s market where a rally in shares is likely to cause potential investors to want the remaining available shares and begin to compete for the privilege of owning the shares. If this type of environment does not exist, then it is a much better approach to delay the buyback until the buyer’s market is ready to respond in the affirmative to the effort.
Smart Asset.
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