A buyback, also known as a “share repurchase,” is a process by which a company buys back its own outstanding shares from shareholders. Companies may choose to buy back their shares for a variety of reasons, including to reduce the number of outstanding shares, to increase the value of the remaining shares, or to return excess cash to shareholders.
There are two main types of buybacks: open market repurchases and Dutch auctions. In an open market repurchase, the company purchases its shares on the open market at the current market price. In a Dutch auction, the company sets a price range within which it is willing to buy back its shares, and shareholders can tender their shares at a price within that range.
There are several reasons why companies might choose to buy back their own shares. One reason is to reduce the number of outstanding shares, which can increase the value of the remaining shares by increasing their ownership stake in the company. This is known as “share dilution.” Another reason is to return excess cash to shareholders, as buybacks can be an alternative to paying dividends. Buybacks can also signal to the market that the company has confidence in its future prospects, as it is willing to use its own cash to buy back its shares.
However, buybacks can also be controversial, as they can be seen as a way for companies to use their excess cash to benefit shareholders rather than investing in the company’s long-term growth or paying employees higher salaries. Some critics argue that buybacks are a short-term financial maneuver that do not benefit the overall economy.