A share repurchase occurs when the company purchases its own shares Rationales for share repurchase buybacks increase EPS and may generate a capital gain signaling about future earnings prospects financial flexibility
An alternative to cash dividend
For reducing the number of the outstanding shares of the company it plans to buy back the shares of its own from the market.
Re-acquired shares are kept and can be resold
Dividends are taxed as ordinary income, but stockholders who sell shares back to firm pay tax only on capital gains realized from the sales
Important reasons for Purchansing Shares:
If shares are perceived to be undervalued
A company has no need for free cash flow (not always)
To generate more income for new projects or line of business
To buyout troublesome stockholders
Differents ways for Repurchasing shares:
Open market
Direct negotiations
Greenmail transactions
Ways for Determing Dividents:
Accourding to john lintner (1956)
Most common approach. It can be summarized thus:
Firm has long-run target dividend payout ratios
Managers focus more on dividend changes.
Dividend changes follow shifts in long-run, sustainable earnings
The Managers are unenthusiastic for making the changes in the dividend that might have to be inverted .
According to Miller and Modligliani
For MM, dividends are cash in hand while gains are at best in the bush, but if the dividend is safe and the capital gain is risky, isn't the shareholder ahead?
True, dividends are more predictable than capital gains. Managers can pstabilize dividends but they cannot control stock price
A dividend increase leads to a transfer of ownership. This means they have traded safe receipt for an uncertain future gains
*Miller and Modligliani published a theoretical paper highlighting the irrelevance of
the dividend policy in a world without taxes, transaction costs and other imperfections.
They are said to be founders of the middle-of-the-road (MOTR) theory.
Middle-of-the-Roaders
A company's value is unaffected by dividend policy
For the proponents of this school, the wonder why company do not increase their share price by distributing more or less income
Perhaps, dividends are where they are because no company believes that it could increase its stock price simply by changing its dividend policy
Stressed that a company can't have high dividend pay out unless they believe that is what investors require. But why should many investors want high payouts?
Corporate Valuation and Share Repurchase
Valuation is very important in Capital Structure analysis.
There are various methods which are used:
Discounted cash flow,
Price earning multiple, and
Net asset value.
Hypothetical Example:
Scenario I
Company X has 100 shares outstanding. It earns $1000 a year
Pays all out as dividend
Dividend per share $1000/100 = $10
Suppose that investors want the dividend to be maintained
indefinitely, and return should be 10 percent. What happens?
Pv Share = $10/0.1 = $100
Since there are 100 shares outstanding, the total market value of the
equity is
Pv Equity = 100 x $100 = $10,000
Discounting cash flow method will also give the same result
(Pv Equity= $1,000/0.10 = $10,000)
Suppose, the company decides that instead of paying cash dividend, it will spend the money on repurchasing its shares. The expected cash flows to share holders (dividends and cash from repurchase) are unchanged at $1,000.
Hence, total value of equity also remains $1,000/(0.1) = $10,000.
Important Implications
Company value is unaffected by the decision to repurchase stock rather than to pay a cash dividend
When valuing the entire equity you need to include both the cash that is paid out as dividends and the cash that is used to repurchase stock
A firm that repurchases stock instead of paying dividends reduces the number of shares outstanding but produces an offsetting increase in earnings and dividends per share.
Conclusion
Share repurchase is mostly common in the United states. Not all share repurchase announcement is completed
It is illegal not to complete share repurchase program
Although, share repurchase is not a substitute for dividend, investors usually interpret it, as an indication of brightness
If we live in an ideal and perfect world, then choices will not matter. The controversy centers on our flawed world
Dividend policy actions by companies is usually a reflection of the shareholders' preferences
The middle stance of the road proponents seem quite appealing but information content is usually misinterpreted
A Breakdown of Stock Buybacks
There are a number of ways in which a company can return wealth to its shareholders. Although stock price appreciation and dividends are the two most common ways of doing this, there are other useful, and often overlooked, ways for companies to share their wealth with investors.
The Meaning of Buybacks
When a company buys back its shares from the marketplaces it is then called as Share Repurchase it is also known as stock buy back .A company uses its cash to buy its own shares so we can think that a company is investing in itself. By repurchasing shares of the company by its own the number of the outstanding shares of the company reduces.. on the earnings of the company the ownership stake of each investor increases because there are less shares and claims .normally the repurchasing of the shares are carried out by the two ways .
Tender Offer:
In tender offer the share holders are offered for a tender offer by the company so that they can submit , or tender ,a portion or all of their shares within a certain time period .the tender offer demand the both :
1: The number of the shares of the company for which the company is looking to repurchase
2: And the price range for which they are ready to pay (which is almost at premium to the market price)
When the investors occupy the offer they will then state the number of shares which they want to tender along with the price for what they are willing .
So the company when receive all the offers it will be able to find the right mix for buying the shares at the lowest cost .
2 : Open Market :
The second option for the company is to buy the shares on the open market just like the generally perceived as a positive thing by the market and it causes the share price to shoot up.
The Purpose for such plans to initiate by the Company:
By asking from the management of the company ,they will like to tell us that the buy back is very essential for using the capital of the company at certain time period . Because the main objectives of the company s management is to maximize the returns from its share holders and it usually increases the value of its shareholders .The main idle line in a buyback press release is "we don't see any better investment than in ourselves". But some times this statement can not be true always.
However there are still a sound objective which influence the companies to buyback shares .
for example :
The management of the company may feel that the market has discounted its share price very suddenly . Therefore the stock price is hit by the market for so many reasons say that weaker then expected earnings results, an accounting scandal or just a poor overall economic climate is .
So when the company by buying its own share by its self spends millions of dollars so its can say that the management believes that the market is so far going in the discounting of the shares that is a positive sign therefore.
Advancement in the Financial Ratios
A company might follow a buy back is also for the improvement and advancement of its financial ratios for whish the market looks heavily focused .this is a questionable motivation .for the making of more values for the share holders if the number of the share is not done but rather it make financial ratios which looks good ,but there is likely occur a problem for the management . Nevertheless if there is a good and a strong and sound objective is there behind the company for initiating a buyback program there will be then a improvement for the financial ratios of the company.The Improvement of its financial ratios in the process may just be a byproduct of a good corporate decision
How this happens:
The buyback reduces the number of the share outstanding .when the company purchase its shares it cancels them or keeps them as a treasury shares hense it decreases the number of the shares in the progress.
Formulas
Return on assets (ROA)= net income / total assets
Return on equity (ROE) = Net income/revenue*revenue/avg.total
assets*avg.totall assets/shareholders equity.
Price-earnings ratio (P/E)= There are various P/E ratios, all defined as:
In the balance sheet the buy backs reduces the numbers of assets and with the reduction the results shows an increase in the ROA and the ROE increases, because there is less equity which is outstanding. Generally in the market view the higher ROA and ROE is positives.
EXAMPLE:
We can take an example that a company buyback the share with a amount of 1 million at $15 per share for a total cash outlay of $15 million .the following are the components of ROA and EPS calculations and how the changes occur in them as a buyback results.
Explanation of the above table :
As in the above table we can see that the cash of the company which was in hand has now been shown a reduction from $20 million to $5 million .because cash in hand was the asset of the company so it will reduce the total assets of the company from $50million to $35 million.
And this will leads to an increase in its ROA , though the earnings of the company have not changed .
Prior to the repurchase the ROA was 4 % ($2 million/$50 million) but there comes an increase in the ROA to 5.71% ($2 million/$35 million). so in the EPS ,an effect of a similar thing shown by which increase from ($2 million/10 million shares) to $0.22 ($2 million/9 million shares).
To improve the price-earnings ratio (P/E) the buyback provide help to the company .so it is one of the most famous and often used measure of value .if we talk about risk of generalization , here we come to know the P/E ratio the market thinks that the lower is much better for this .
Lets say, that the share remains at $15 so the P/E ratio before the buyback is 75 ($15/$0.2) and the P/E ratio falls to 68 ($15/$0.22) after the buyback due to the decrease in the outstanding shares of the company .as we can also say that:-
Fewer shares + same earnings = Higher EPS
As prior to the repurchase the company is now less expensive based on the P/E ratio as the value of measure, despite of this there was no changes occur in the earnings .
Dilution :
By reducing the dilution which is offen caused by the manificient staff employee stock option plans this is the also reason by which the company can moveforward .
Labor market is offen created by the bull market and the strong economies .The company have to struggle hard to keep the staff and (ESOP). Including the compensation packages .
The share repurchase and the stock options both are of opposite effects. They increase the outstanding numbers of shares at the time when the options are exercised .
In the example given above we have seen that the financialmeasures which areEPS and P/E are affected with the increase in the outstanding sharesof the company .where as , when we talk about the dilution here comes an opposite effect of repurchase because it makes the company financial appearance weaker .
By continuing the same previous example ,lets assume that the shares of the company has increase by one million .here the EPS reduces to $0.18 per share from $0.20/share
A company may feel the need to repurchase shares to stay away or eliminate excessive dilution after years of productive stock option programs.
Tax Benefit :-
The company distributes dividends to its shareholders hence the buy back is similar to a dividend in many ways .usually an important advantage that the buybacks is that they taxed at ordinary income tax rates .the tax rate is dividend now in equivalent to the rate on capital gain as per the passing of the Jobs and Growth Tax Relief Reconciliation Act of 2003.
Conclusion :-
For viewing a positive sign for the share holders it can only be happens when the buyback represents the best possible investment for a company then its effect will definitely be in positive because the stock is undervalued .so if we have to ask is the buyback good or bad ?We can give the answer given above .it is mostly in the case of finance .
If a company is just using buyback to hold up ratio provides the short term relief to an poorly stock price or get out from too much dilution.
CORPRATE RECOVERY
Firms are expected to adopt turnaround (financial and corporate) strategies when they experience performance shocks. Turn around actions include
Financial strategies
Corporate restructuring strategies
Do firms adopt turnaround strategies to deal with performance shocks?
Do turnaround strategies result in performance improvement?
Is there any interaction effect of turnaround actions on firm performance?
Related literature
Firms review their financial strategies following performance declines (Slatter, 1984; Ofek, 1993; Chowdhury and Lang, 1996;).
Financial leverage
Revenue growth
Dividend payment
Working Capital
Firms adopt Corporate restructuring strategies following performance shocks (Inverson and Pullman, 2000; Chen et al 2001, 1993; Kang and Shivdasani, 1997; Denis and Kruse, 2000).
By Change of management
By Employee layoffs
Asset sales
Divestitures
COLLECTION OF DATA
Financial data sourced from Financial Analysis database: restructuring data from SDC and Signal G announcements.
Firm performance higher than industry average in one year but fall below the industry average the following year.
Identify firms that experienced performance shocks.
Eliminate the firms which have experienced financial distress prior to shock
Checked the impact of new CEOs on performance shocks
Corporate Crisis Management
The management which is having major crisis needs to prevents .plan .test, evaluate , and maintenance Is also essential to mitigate and lower the consequences . The company can determine the outcomes in these the employees ,community and the company also includes which are been effected .in severely impacts people ,property and the environment is effected by the crises in the natural, accidental or intentional event . Effects might include losses, disabling injuries, significant destruction or corruption, or risk the organization's reputation or products, threatening a company's reputation or its continued existence. The consequences are independent of company size, quality of management, industry or location. Technology and ever changing threats challenge the preparation needed to manage situations that may affect an organization's future. Minimizing risk by application of process safety management tools and security systems is an important component of an overall plan. But simply drafting a response plan that prepares for naturally accidentally, or intentionally caused disaster or emergency scenarios is not enough.
A Crisis Management Process can apply to any size company. It describes a series of interrelated processes and activities that will assist in creating, testing, and maintaining an organization-wide plan for use in the event of a crisis that threatens the viability and continuity of the organization. This publication is a tool to help organizations consider the factors and steps necessary to prepare and manage for a crisis (disaster or emergency), taking appropriate actions to protect the employees and community and help ensure the organization's continued viability. When initiating a response, it is important to insure that the goals protect the following interests in order of their priority is :
To Protect the environment
To Protect assets
To Restore critical business processes and systems
To Reduce the length of the interruption of business
To Minimize reputation damage
To Maintain customer relations
Financial Disaster:
Financial disaster into two major parts which are Currency crisis and Banking crisis which can be defined as ,
Banking crisis- Banking crisis occur when a financial system become illiquid or insolvent. This type of crisis refers to bank runs, closures, mergers, takeovers, or large-scale assistant by the government to a group of banks or banking systems, should the crisis turn out to be systematic.
A recent approach By Mish kin defined financial crisis as follows
"A financial crisis is a interference to financial markets in which adverse selection and moral hazard problems become much worse, so that financial markets are unable to efficiently channel funds to those who have the most productive investment opportunities". Thus a financial crisis is a sharp decline of a group of financial and economic indicators like economic growth, imbalance between money supply and demand, declining asset prices, potentially also accompanied by failures of financial institutions like banks.
Conclusions
By taking some measures performance shocks can be controlled which are as follows,
Efficiency gained through proper adjustment to financial policies (e.g. financial leverage and operating expenses) result in a negative at the same time effect on firm performance
Corporate restructuring activities (e.g. Layoffs and divestitures) have lagged impact on performance improvement
The interaction of financial and restructuring activities may result in an incremental impact on firm performance
Performance shocks are reversible but through proper use of financial and corporate restructuring strategies
Management can use the analysis as a guide to designing turnaround actions to deal with performance shocks
SUMMARY
So hence we reviewed in the Corporate restructuring; spin-offs, equity carve - outs, divestments and respectively share repurchases of different organizations In these circumstances organization have some sort of corporate restructuring. Accounding to the modern era the restructing has become a very higher precedence for the firms scrambling to change and for getting a live and therefore it succeed in this hard economic climate The profitability of spin-off parents and subsidiaries improves in the long run, while on the contrary, carve-outs subsidiary firms' profitability reduces. Carve-out firms grow more in earnings as well as in revenues than spin-offs in the years before the transaction, but they are unable to maintain these growth rates Carve-out firms' operating performance, in contrast, is on a high level around the transaction and carve-out firms are not able to subsequently increase their operating performance.
In my view the deciding factor in applying spin-offs and carve-outs is rather whether the parent company is in need of cash or not. If there is no funding need, management should focus on how to create additional value. Therefore, managers regularly have to benchmark their firm's relative valuation and stock market and operating performance. If there are signs of underperformance, the management needs to decide how to tackle it.
