Targeted Repurchase

What is a Targeted Repurchase?

A targeted repurchase is an important anti-takeover strategy used by target firms to prevent an unwanted takeover attempt. The main objective of such a strategy is to repurchase enough of the company’s own shares allowing the firm to regain a controlling interest in the company. This prevents the hostile bidder from moving forward with the takeover attempt. Typically, the target company will offer shareholders a premium on top of the market value of the shares, as an enticement to sell their shares. Once the target firm has successfully repurchased enough shares, it can then fight off the hostile takeover attempt. In some cases, the repurchase price may be so attractive that the hostile bidder may choose to sell its shares and benefit from the premium offered.

Participation in a targeted repurchase is generally limited to the target company’s shareholders. This includes both current and previous shareholders. Special Interest Groups (SIGs) such as retail investors, institutional investors, hedge funds, and private equity firms are also eligible to participate in a targeted repurchase. It is important to note that a target company is prohibited from participating in its own stock repurchase program.

Stock repurchases are subject to certain trading criteria, including legal considerations and contractual restrictions that must be understood and complied with. Companies should ensure that the necessary processes are in place to ensure compliance. Companies should also review their debt agreements to ensure that the repurchase does not trigger any financial ratios. Furthermore, reporting foreign private issuers are required to report their repurchases according to Item 15(e) of Form 20-F, and closed-end management investment companies must report their repurchasing activity according to Item 8 of Form N-CSR. Under Rule 10b-18, a person or entity is an “affiliated purchaser” if it acts, directly or indirectly, in concert with the issuer with the intent to acquire the issuer’s securities, or is “an affiliate who, directly or indirectly, controls the issuer’s purchases of such securities, whose purchases are controlled by the issuer, or whose purchases are under common control with those of the issuer.” Rule 10b-18 purchases must also be made by or on behalf of one broker or dealer, and in the event more than one affiliated purchaser (or a company and one or more of its affiliated purchasers) is involved, the company and its affiliated purchasers must use the same broker or dealer. Repurchases may be made after the close of the primary trading session until the end of the period in which the last sale prices are reported in the consolidated system, as long as such purchases satisfy the rule’s requirements and are made at prices that do not exceed the lower of the closing price of the primary trading session in the security’s principal market and any lower bids or sale prices subsequently reported in the consolidated system.

Company share repurchases are a popular way for corporations to reduce the number of their shares in circulation, which can lead to increased share value. However, there are both pros and cons to this practice. On the plus side, a share repurchase can show investors that the company believes its shares are undervalued, and it can make the stock more attractive to potential investors. However, it can also be ill-timed, leading to a drop in the share price, which indicates that the company is not as healthy as it appeared to be. It can also give the impression that the corporation does not have other profitable opportunities for growth. Finally, a share repurchase can put the business in a precarious situation during economic downturns. Overall, it is important for corporations to carefully weigh the pros and cons of a share repurchase before deciding whether it would be beneficial for their business.

Determining the Need for Targeted Repurchase

Step 1: Understand the hostile takeover threat.

• The first step to determine whether a targeted repurchase is needed is to assess the level of threat posed by a hostile takeover attempt.
• Identify the potential acquirer and then analyze the level of financial resources and voting power the acquirer might possess.
• If the acquirer has the resources to acquire a significant stake in the target company and potentially gain voting control, then a targeted repurchase strategy may be required.
  

Step 2: Assess the target company’s financial situation.

• Once the threat level is assessed, the target company should then assess its financial situation in order to determine the feasibility of a targeted repurchase.
• The target company should analyze its financial resources, the cost of the repurchase, and the amount of stock it can realistically expect to acquire.
• If the repurchase cost is too high or the target company does not have the financial resources to acquire a significant stake in the company, then a targeted repurchase strategy may not be feasible.
  

Step 3: Determine the repurchase price.

• Once the target company has determined it can afford a targeted repurchase, it should then set a repurchase price.
• The repurchase price should be attractive enough to entice the hostile bidder to sell its shares.
• A repurchase price that is significantly higher than the market value of the shares is more likely to entice the hostile bidder to sell.
  

Step 4: Execute the targeted repurchase.

• Finally, the target company should execute the targeted repurchase.
• This involves offering the hostile bidder the repurchase price and purchasing the shares.
• If the target company is able to acquire a majority of the shares, then the hostile takeover attempt will likely be thwarted.

When Should Targeted Repurchase Be Considered

1. If you believe that the stock price is significantly below its intrinsic value: When a company believes its current share price is undervalued, a targeted repurchase of the stock can be beneficial. Investors should consider the size of their free cash flows, the level of liquid assets, and the likelihood of a takeover attempt when evaluating the decision to initiate a share repurchase. A share repurchase may also be beneficial when the company has sufficient cash reserves, during periods of financial health, and when the stock price is relatively high. It is important to be aware of the risks associated with a share buyback, such as the potential drop in stock price if the repurchase is ill-timed or the possibility of facing financial difficulties if the economy takes a downturn.
2. If you believe that a company is undervalued and its stock is likely to increase in value in the future: A company is undervalued when the stock price is lower than what the company is actually worth. This can be for a variety of different reasons such as a weak global economy, a recent drop in share prices, or investors not having trust in the company's management. When a company is undervalued, it can be a good idea for the company to buy back its own shares. A targeted repurchase can be a great way to increase shareholder value and reward those shareholders who have kept their faith in the company. By reducing the number of shares in circulation, a targeted repurchase can increase the value of the remaining shares. Additionally, a targeted repurchase can also lead to an increase in Earnings Per Share (EPS). By increasing the EPS, the company's Price-to-Earnings Ratio (P/E) can decrease, which can make the company appear more attractive to potential investors. While a targeted repurchase may not guarantee a higher stock price, it can help create better market conditions and increase the value of the remaining shares.
3. If you have excess cash and would like to invest it
   • Determine if a targeted repurchase is the most appropriate way for a company to use its excess cash. Consider that a share repurchase is a viable means to cut down surplus cash and can increase shareholder wealth by reducing agency costs of free cash flows.
   • Review any legal or contractual restrictions that may apply to the repurchase program, including any explicit prohibitions or limitations contained in debt agreements. Also, consider the potential effects of the repurchase on any financial ratios that could be triggered.
   • Comply with any applicable stock exchange rules regarding advance notice of material corporate developments and other filings.
   • Calculate the size of the pre-repurchase free cash flows and build-up of liquid assets. Use this information to determine the valuation consequences of the targeted repurchase announcement.
   • Execute the targeted repurchase program, taking into account any available tax advantages, and monitor the level of liquid assets to ensure that it is not permanently depleted.
4. If you want to strengthen the stake of long-term shareholders: A targeted repurchase can strengthen the stake of long-term shareholders by reducing the number of existing shares, making each worth a greater percentage of the corporation. This can lead to an increase in the stock's earnings per share (EPS), resulting in a lower price-to-earnings ratio (P/E). This can make the stock more attractive to potential investors and increase the value of the shares for long-term shareholders. In addition, a targeted repurchase can reduce agency costs associated with free cash flows, leading to further increases in shareholder wealth.
5. If you want to reduce the number of shares in circulation
   • Identify the target amount of shares to be repurchased.
   • Determine the pre-repurchase free cash flows and liquid assets of the company.
   • Offer shareholders the option of tendering their shares directly to the company at a fixed price.
   • Monitor and track the progress of the repurchase.
   • Receive the repurchased shares and decrease the total number of outstanding shares in circulation.
6. If you are planning to make an acquisition or a tender offer: When looking at whether to do a targeted repurchase for an acquisition or a tender offer, it is important to consider the different regulatory requirements and the potential for triggering a tender offer. A company may consider a tender offer if they want to repurchase a large number of shares at one time without being subject to the volume limitations under Rule 10b-18. A tender offer must comply with significant disclosure and substantive requirements under Rule 13e-4 of the Exchange Act and other restrictions, such as remaining open for at least 20 business days following commencement, offering the highest price paid for any share tendered, allowing tendered securities to be withdrawn, and providing a cooling-off period of 10 business days after the closing of the tender offer. On the other hand, a share repurchase program that complies with Rule 10b-18 should not constitute a tender offer as the purchases are made at the prevailing market price and without any solicitation of shareholders.
7. If you want to retain the best employees: Targeted repurchases can be used to help retain the best employees. By repurchasing a block of shares on favorable terms from a particular shareholder or shareholders, the target firm can reward and incentivize the best employees while also increasing shareholder value. This is because the repurchase of stocks can result in positive stock returns, which can be used to give the best employees higher salaries or other incentives. Additionally, research has shown that companies with significant outside directors are more likely to appoint outside CEOs, which can help the firm retain its best employees by providing additional levels of monitoring and accountability. This is beneficial for the firm because it provides a way to ensure that its best employees stay motivated and engaged in their work.
8. If you have a history of share repurchases and want to maintain investor confidence: It is important to perform a targeted repurchase when a company has a history of share repurchases because there are legal and contractual considerations that need to be taken into account. It is important to review the company’s debt agreements to ensure that any potential share repurchase program does not violate any explicit prohibitions or limitations contained in them. The company must also consider the potential effect of the repurchase on any of the financial ratios that may be triggered inadvertently as a result of the repurchase. Additionally, stock exchange rules regarding advance notice of material corporate developments and other filings may apply. Finally, reporting foreign private issuers and closed-end management investment companies must report their repurchasing activity to the relevant regulatory bodies.
9. If your company’s bylaws allow it: Yes, it is possible for a company to do a targeted repurchase under its bylaws. Companies should review their bylaws and debt agreements to ensure that any repurchase program that is implemented is in compliance with all applicable laws and agreements. Specific requirements will depend on whether the company is a Delaware corporation and if the company is a foreign private issuer or closed-end management investment company. For example, Delaware corporations must ensure that the value of their assets exceeds their liabilities by an amount at least equal to their stated capital. Companies should also ensure that they are in compliance with Rule 10b-18, which stipulates that only one broker or dealer can be used on a single day and that purchases must not be solicited by the company or its affiliated purchasers. Companies can also access ECN or other ATS liquidity to execute repurchases on behalf of the company or any affiliated purchaser.
10. If it is a cost-effective way of returning cash to shareholders: Yes, a targeted repurchase can be a cost-effective way of returning cash to shareholders. Evidence suggests that the valuation consequences of targeted share repurchases are positively related to the size of the firm's pre-repurchase free cash flows and to the firm's pre-repurchase build-up of liquid assets. Furthermore, the level of liquid assets is reported to decline permanently after the repurchase. This shows that a share repurchase can be an effective way to reduce surplus cash and reward shareholders with a return on their investment. Additionally, the reduced number of shares increases the wealth of the shareholders by reducing agency costs of free cash flows. In addition to these benefits, a share repurchase also improves key performance metrics such as return on assets, return on equity, and earnings per share. This makes the stock more attractive to potential investors and shareholders can receive larger dividends as the total number of shares decreases. However, it is important to note that share repurchases can also be ill-timed and can give investors the impression that the corporation does not have other profitable opportunities for growth. Thus, it is important to consider economic factors and the financial state of the business before making a decision on a share repurchase.

Share Repurchase Vs. Share Buyback =

A share repurchase is a transaction whereby a company buys back its own shares from the marketplace, usually because management considers them undervalued. The company buys the shares directly from the market or offers its shareholders the option of tendering their shares directly to the company at a fixed price. Repurchases reduce the number of outstanding shares which investors feel will drive up share prices.

A share buyback, on the other hand, is a decision by a company to buy back its own shares from the marketplace. Companies tend to repurchase their shares when they have cash on hand and the stock market is on an upswing. Buybacks can be done to boost the value of the stock and to improve the financial statements.

The Inflation Reduction Act of 2022 includes an excise tax of 1% on share buybacks of $1 million or more made after Dec. 31, 2022. This tax doesn't apply to any new public or employee stock issues.

Overall, share repurchases reduce the number of outstanding shares, while share buybacks can be done to improve the company's financial position and boost the stock's value. The Inflation Reduction Act of 2022 also places an excise tax on share buybacks of a certain size.

How to Know When a Company is Repurchasing Shares

• Check the company's quarterly earnings report. This will give you an idea of how much the company has spent on share repurchases and whether or not they are currently doing so.
• Analyze the company's balance sheet. You should be able to see a reduction in the company's available cash, and the number of outstanding shares should be reduced as well.
• Check the company's stock price before and after a share repurchase. If the stock price has increased, then the repurchase was successful. If the stock price has decreased, then the repurchase may not have been successful.
• Monitor the company's financial health. Repurchasing shares may be ill-timed if the company is not in a period of financial health.
• Pay attention to the company's growth opportunities. If the company is not investing in other profitable opportunities for growth, then it may be relying too heavily on share repurchases.

Benefits of Targeted Repurchase

1. It increases the company's share of equity, effectively increasing its leverage and value: Performing a targeted repurchase reduces the number of outstanding shares, increasing the value of each remaining share. This increase in equity value boosts the company's financial position, effectively increasing its leverage and value. Evidence suggests that the valuation consequences of targeted share repurchase announcements are positively related to the size of the firm's pre‐repurchase free cash flows and to the firm's pre‐repurchase build‐up of liquid assets. Additionally, the repurchase reduces surplus cash, which can reduce agency costs and increase shareholder wealth. However, share repurchases can also hide a slightly declining net income, so it is important to consider the financial state of the business before deciding to move forward with a buyback.
2. It can be used to bring down the company's outstanding shares if there is an oversupply: A targeted repurchase can be used to bring down the company's outstanding shares if there is an oversupply. Step-by-step instructions:
   • Set a price for the stock repurchase.
   • Identify which shareholders are eligible for the repurchase offer.
   • Put out a public announcement to inform shareholders of the repurchase offer.
   • Send letters to all eligible shareholders offering to purchase their shares.
   • Begin purchasing shares from those shareholders who accept the offer.
   • Monitor the stock market to ensure that the repurchase does not push the stock prices too low.
   • Once the desired number of shares has been purchased, cancel the repurchase offer.
   • Record the repurchased shares in the company’s balance sheet.
3. It can be used to increase investor confidence in the company: A targeted repurchase of stock can increase investor confidence in a company by signaling that its shares are undervalued and that the company has plenty of cash on hand. This can lead to an increase in the stock price and the company's market value. An increase in the stock price gives investors the impression that the company is financially healthy and has a promising future. Additionally, the repurchase can reduce the number of outstanding shares, resulting in higher earnings per share (EPS) and a lower price-to-earnings ratio (P/E). This can make the stock more attractive to potential investors. Lastly, the repurchase can reduce the level of liquid assets held by the firm, which reduces agency costs of free cash flows and increases shareholder wealth.
4. It can be used to increase shareholder value if done at the right time: A targeted repurchase is a strategic move used by companies to increase shareholder value. It involves buying back stock from the open market or directly from investors, reducing the number of outstanding shares, and increasing earnings per share (EPS). This increase in EPS can elevate the market value of the remaining shares, which helps increase equity value. Additionally, the company's financial position and liquidity can be improved by repurchasing shares. As the number of shares held by the corporation decreases, its ability to pay dividends or take on new investments increases, benefiting shareholders.
5. It can be used to bring down the company's share price to make a takeover easier: A targeted repurchase can help bring down a company's share price to make a takeover easier due to the stock price initially rising and then eventually falling at the time of the repurchase. This drop in the stock price after a targeted repurchase can imply that the company is not as healthy as it once was, and the market may believe that the company does not have growth opportunities. When a company has plenty of cash or during a period of financial health and the stock market, the stock price of the company is likely to be high and the price may drop after a buyback. This drop in the stock price can make it easier for a hostile bidder to acquire the company at a cheaper price.
6. It can be done to increase cash reserves if the company has an excess: Performing a targeted repurchase of a company's own stock can increase cash reserves if the company has an excess. When a company repurchases its own shares, shareholders are given a chance to sell their shares back to the company, thereby reducing the number of shares outstanding and increasing the value of each of the remaining shares. This increased value of the remaining shares often corresponds to an increase in the company's stock price, which can in turn lead to an increase in the company's cash reserves. Additionally, a repurchase can reduce the agency costs associated with free cash flows, which can also increase the company's cash reserves. For the repurchase to be successful, however, the company must ensure it is in compliance with applicable legal restrictions and requirements and must have the necessary processes in place to ensure compliance.
7. It can be used to increase liquidity if the company wants to take advantage of market opportunities: Targeted share repurchases can increase liquidity by reducing the number of outstanding shares. When a company repurchases shares, they are reducing the number of shares outstanding, which increases the relative ownership of the remaining shareholders. This reduces the supply of shares and drives up the stock price, leading to an increase in liquidity. Furthermore, repurchases can reduce the company's cost of free cash flows by reducing the amount of idle cash that would otherwise require oversight and monitoring. This can result in increased shareholder wealth, as the free cash flow is put to more productive use.
8. It can be used to repurchase shares of a subsidiary in order to consolidate the company: A targeted repurchase can be used to repurchase shares of a subsidiary in order to consolidate the company. This involves the company making an offer to purchase specific shares of its subsidiary. Step-by-Step Instructions:
   • Analyze the company's financial situation and determine if a targeted repurchase is feasible.
   • Determine the market value of the shares of the subsidiary and make an offer to purchase them.
   • Obtain approval from shareholders to repurchase the shares.
   • Execute the repurchase transaction and pay for the shares.
   • Once the transaction is completed, the company will own all of the shares in the subsidiary.
   • The subsidiary is then consolidated into the company's financial statements.
9. It can be used to reduce the company's liabilities: A targeted share repurchase can help reduce a company's liabilities by reducing the total assets of the business and increasing shareholders' total dividend payout. This can improve the firm's return on assets, return on equity, and other metrics. Additionally, by reducing the number of shares outstanding, earnings per share can increase even if net income remains the same or decreases. By filling the gap between excess capital and dividends, a company can return more money to its shareholders without locking into a pattern of regular dividends. However, due to the Inflation Reduction Act of 2022, companies that perform share buybacks of $1 million or more after Dec. 31, 2022, will be subject to an excise tax of 1%. Additionally, the timing of share repurchases can be ill-timed, and the stock price may drop after the repurchase is completed. Repurchasing shares can also give investors the impression that the corporation does not have other opportunities for growth. Lastly, if the economy takes a downturn or the corporation faces financial obligations it cannot meet, performing a share repurchase will put the business in a precarious situation.
10. It can be used to increase profit if the company does it at the right time: A targeted repurchase can be an effective method of increasing profit if it is done at the right time. By repurchasing shares, a company can reduce the number of outstanding shares and increase the value of each share. This increases the EPS, which in turn will reduce the price-to-earnings ratio (P/E). A lower P/E ratio means the stock appears to be more attractive to potential investors, which can lead to an increase in the stock price. Additionally, repurchasing shares can increase shareholder wealth by reducing agency costs of free cash flows. If the repurchase is timed correctly, the stock price can rise significantly, resulting in higher profits for the company.

Safe Harbor Provision for Repurchasing Shares

The Safe Harbor provision for repurchasing shares is a rule laid out by the Securities Exchange Act of 1934 (the Exchange Act) to protect companies from allegations of market manipulation when they are executing their repurchase program. This rule, referred to as Rule 10b-18, gives companies a nonexclusive safe harbor against such allegations as long as they meet all of the conditions laid out in the rule, including that all of the bids and purchases must be made through one broker or dealer per day and that the aggregate purchases cannot exceed 25% of the average daily trading volume for the purchased security. Additionally, the purchases cannot be made at a price that exceeds the highest independent bid or the last independent transaction price of the security. This Safe Harbor provision does not protect companies from any other violations of the Exchange Act and Rule 10b-5, such as violations arising from purchases made by an issuer on the basis of material nonpublic information.

Insider Trading Laws Pertaining to Repurchasing shares

The SEC has reiterated in light of the COVID-19 crisis the importance of maintaining market integrity and adhering to corporate controls and procedures, particularly with respect to material nonpublic information and insider trading. On March 23, 2020, the co-directors of the SEC’s Division of Enforcement remarked that corporate insiders “are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances,” especially given potential delays in disclosure filings and earnings releases. Those with access to material nonpublic information should be especially mindful of their market activities and their obligations to keep such information confidential and to refrain from illegal securities trading.

See Also

Shareholder