Company buy back of stock

Discussion in 'Economics' started by bhowerter, Jan 5, 2006.

  1. bhowerter


    Why do they do it? When they do it, does it mean the total number of stocks available goes down? If not, then who owns the stocks that the company bought? It confuses me, because I don't see how a company can own itself.

    Related questions:
    When a company makes an offering, do they stipulate what percent of the company the new stocks will own? When they make a secondary offering, do they specify another percent of the total company? What if the company was 100% owned by stockholders, is it still possible to make a secondary offering, and if it is, wouldn't that just reduce the value of the existing shares?

    -- Thanks,
    -- Confused in Colorado...
  2. Truff


    When a company buys back stock they ARE actually buying the stock that is outsatnding. Once the stock is bought it is no longer outstanding and lowers the amount of shares that are outstanding. The shares bought still remail part of the float. Companies do this for several reasons. the 2 main reasons are they think the stock is going higher or they are looking to reduce the # of outstanding shares to make there earnings lookk better than they actually are.
  3. They do it because they believe the value of the stock is worth more than the current price. Say QLTI for example, they plan on buying back the stock with the money they have in the bank.

    I believe that in the case of NOK, they had a buyback and did in fact reduce the shares outstanding by cancelling the shares once the firm bought them back. - Im assuming this would lower the float by whatever $ amount was bought back.

    In extreme cases, this is why hedge fund and vulture funds get involved, like Carl Icahn. Say the company trades at $5 a share, 100 million shares trade, but the value of assets is 750 million. A vulture investor can break up the company sell the assets and make 50% on his money.

    If there is a 2nd offering, they do as follows-

    A registered offering of a large block of a security which has been previously issued to the public, by a current shareholder. The proceeds of the sale go to the holder, not the issuing company, and the number of shares outstanding does not change. also called secondary distribution.
  4. TGregg


    Be cautious about trading based on company announced buybacks. They love to scream from the rooftops about how much stock they are buying back, but seem to forget to mention how much more they are issuing.

    I watched MSFT over a year as they announced buybacks. At the end of their financial year they had more shares outstanding than they had when they announced. They had issued more stock than they had "bought back". Now that might have been due to stock options or employee purchase program or whatever, but the fact is, the float went up not down.
  5. bhowerter


    Thanks, everyone, this helps.

    What I still don't understand is this:
    when a company makes an additional offering or they buy back stocks, yes they increase or reduce the float, but do they at the same time make a higher or lower percentage of the company publicly available?

    So, for example, if BradCompany has 1 million shares float and is fully owned by the pulbic, and we buy back 1/2 of it, does that mean that the remaining 500,000 shares now own 100% of BradCompany (and so their value would double) or does it mean that BradCompany is only 1/2 publicly owned now.
  6. The shareholders agree to buyback stock XYZ using Stock XYZ's bank account to buy the stock. There is then 50% less stock available for a period until the company decides to liquidate their holdings of the stock. Could be years until they liquidate.
  7. Yup, this is exactly what is going on. It's a cash transfer from shareholders to management.

  8. Funny how the buyback program merits a news release but the option grants a footnote in the end-of-year annual report.