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You just got a tender offer from company ABC to buy back its shares of stock, which you purchased from your broker a few years back. But the stock price has not risen as anticipated and the tender offered by the Company is to some extent over market value. It is alluring to take the offer but conversely, when ABC Company buys its own stock back, there will be a reduced amount of stock exceptional, and that could help increase its price.

The investment always has catch-22- will they never stop? In the direction to intertwine our approach through this predicament, we first have to scrutinize the every possible ways a company can instigate a buyback program or stock repurchase accord.
The first way is to initiate buyback program is to make a tender offer to its shareholders. A tender offer is basically an offer to its existing shareholders sell a little fraction of their shares back to the company. The company affirms the no. of shares it is willing to buy, at what price, and for what period of time. This is one way used to buy back stock from smaller shareholders.

Usually company uses the second way to buy its own stock on the open market and at does not matter what market price the shares domination. When the company proclaims buying of stock in open market then it will usually state the no. of shares it offers to buy, and the period of time it will keep the offer open.

If ABC Company, Inc. were to declare such a program, it might declare, “It intends to buy back 50 crore worth of its stock more than a two-year period. Since the company doesn’t know what the price per share will be over the next two years, the repurchase program will be expressed as a dollar amount rather than a set number of shares.”

Whatever method is used by a company, the real question is why the company wants to buy back its stock in the first place?

The answer to that question is rather easy. Let’s suppose that, before the buyback, ABC Company had a market capitalization of 250 crore, that it had 10 crore shares outstanding, and that the market price per share was 25.00. Below this scenario, each share of stock would stand for .0000001 of company ownership.

If the company spends 50 crore to buy its shares back at 25 per share, it will be able to repurchase 2 crore of its shares. That will leave 8 crore shares outstanding. Then, each outstanding share would then represent .000000125 of company ownership. Theoretically, the price per share would then be 31.25 (8 crore x .000000125). Not a bad boost at all!

Obviously, not all companies are motivated to increase share value in this manner. Instead, a growing reason for repurchase plans is to reduce the number of shares outstanding, as opposed to growing the price per share. Companies that have liberally doled out stock options to employees in the past, now find themselves offering buyback programs because the exercise of the stock options has increased the number of the company’s outstanding shares. An increased number of outstanding shares can adversely affect important ratios, like earnings per share and price/earnings (P/E), all of which can negatively impact share price.

A repurchase plan can also cause problems if a company overpays for its own stock. If natural market forces or a business downturn creates a decline in stock price, the company will not only have failed to increase stockholder value, but it also will have consumed much-needed capital, capital that could have been used for other business purposes.

In the final analysis, the evaluation of a stock buyback plan is nothing more than an evaluation of the company itself. If the company’s stock price is undervalued and buying back some stock will result in an overall reduction in the number of shares outstanding, then holding on to your shares could be a good bet. On the other hand, if it appears that company management is trying to manipulate the stock price to make the company appear better than it really is, and then you should think about divorcing yourself from the company.