What is Accelerated Share Repurchase?
The term “accelerated share repurchase” refers to the investment strategy in which a listed company purchases a large volume of its outstanding shares from the market in a fast track way, while an investment bank as the facilitator for the deal. Usually, the company buying back its own shares indicates that it may be expecting very positive prospects in the near future that may provide an upward push to its stock price and so the company seeks to hold a higher volume of share with them.
Explanation
Typically, accelerated share repurchase is seen as a credible commitment by a company to buy back its shares within a short span of time. A company opts for an accelerated share repurchase program when it believes that its stock price is largely undervalued as this method helps them to boost stock value. However, the inclusion of the accelerated share repurchase clause in a repurchase program restricts the ability of a company to alter its announced plan due to some unanticipated events, such as unexpected shocks to cash flow, a sudden change in price and liquidity of its shares, etc.
How does Accelerated Share Repurchase Work?
The process of an accelerated share repurchase program can be broken down to the following four steps:
- The company proposing the accelerated share repurchase program must furnish upfront fund to the investment bank.
- Next, the company must enter into a forward contract, which is an agreement between the purchaser and the seller of the stocks to be purchased at a predetermined price on a future date.
- Next, the investment bank borrows the company’s stocks from the investors, which may be either individuals or organizations.
- Finally, the investment bank sell the borrowed stocks to the company that initiated the accelerated share repurchase program. In this way, the entire process gets closed.
Examples of Accelerated Share Repurchase
Some of the major examples of accelerated share repurchase have been discussed below:
- In December 2020, Planet Fitness Inc. (PFI)made it public that it has entered into a $300 million accelerated share repurchase agreement with JPMorgan Chase Bank (JPM). As per the agreement, PFI will purchase the shares of JPM as part of its $500 million share repurchase authorization that it had already announced in November 2019.
- In January 2020, Citrix Systems Inc. (CSI) announced that it has entered into a $1 billion accelerated share repurchase program with Goldman Sachs & Co. LLC (GS) and Wells Fargo Bank(WF) as part of its capital return program.
- In February 2020, American International Group Inc. (AIG) made it public that it has entered into a $500 million accelerated share repurchase agreement with Citibank (CB) to buy back AIG’s stocks as part of its existing share repurchase authorization worth $2 billion that was announced earlier in February 2019.
Uses of Accelerated Share Repurchase
A company may opt for an accelerated share repurchase program for the following reasons:
- Send a positive market signal indicating that the stock price is likely to increase.
- Boost earnings per share(EPS) by reducing the no. of outstanding shares in the market.
- Arrest sudden down trend witnessed in the stock price.
- Grow your own equity stake in the company.
Accelerated Share Repurchases vs Open Market Repurchases
The main differences between accelerated share repurchases and open market repurchases are:
- In accelerated share repurchase, the company doesn’t purchase the shares from the open market, which is seen in the case of open market repurchases. In accelerated share repurchase, the company rather borrows its own shares from an intermediary, an investment bank.
- In accelerated share repurchase, the company has enter into a forward contract with the investment bank, while there is no such obligation in case of open market repurchases. The forward contract compels the company to repurchase the specified no. of shares at an apre-determined price during the contract period.
Advantages
Some of the major advantages of accelerated share repurchase are as follows:
- For investors, accelerated share repurchase may indicate that the company has adequate liquidity to sail through economic crises or emergencies.
- The repurchase of shares helps in boosting the EPS owing to the decrease in the no. of outstanding shares in the market.
- Such a share buyback program can provide protection against unfavorable events, such as hostile takeovers.
- The accelerated share repurchase program can act as a catalyst for the ongoing open market repurchase program.
- Post share repurchase program, companies usually tend to increase the dividend payout as the no. of shareholders decline, which bodes well for investor return.
Disadvantages
Some of the major advantages of accelerated share repurchase are as follows:
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- An accelerated share repurchase program can serve as an easy cover-up for a company’s weak financial condition. Such a program improves the financial metrics drastically and creates a false sense of confidence among the investors regarding the company’s financial situation.
- In some cases, it has been seen that the insiders of the company make hay out of the stock repurchase program and the reported EPS figure don’t change at all, leaving the investors high and dry.
- The strategy of the accelerated share repurchase is not seen as a growth inducing one as such stock purchase leads to poor utilization of the company’s capital. Some critics believe that such companies should better employ the money to fuel business growth.
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