In Practice: How Do You Buy Back Stock?
The process of repurchasing equity will depend largely on whether the firm intends to repurchase stock in the open market at the prevailing market price or to make a more formal tender offer for its shares. There are three widely used approaches to buying back equity:
- Repurchase Tender Offers:In a repurchase tender offer, a firm specifies a price at which it will buy back shares, the number of shares it intends to repurchase, and the period of time for which it will keep the offer open and invites stockholders to submit their shares for the repurchase. In many cases, firms retain the flexibility to withdraw the offer if an insufficient number of shares are submitted or to extend the offer beyond the originally specified time period. This approach is used primarily for large equity repurchases.
- Open Market Repurchases:In the case of open market repurchases, firms buy shares in the market at the prevailing market price. Although firms do not have to disclose publicly their intent to buy back shares in the market, they do have to comply with SEC requirements to prevent price manipulation or insider trading. Finally, open market purchases can be spread out over much longer time periods than tender offers and are more widely used for smaller repurchases. In terms of flexibility, an open market repurchase affords the firm much more freedom in deciding when to buy back shares and how many shares to repurchase.
- Privately Negotiated Repurchases:In privately negotiated repurchases, firms buy back shares from a large stockholder in the company at a negotiated price. This method is not as widely used as the first two and may be employed by managers or owners as a way of consolidating control and eliminating a troublesome stockholder.