![]() ![]() Royal Mail said the buyback “offered shareholders appropriate value for money and met the expectations of the programme. “Companies and their boards do not seem to understand that if the stock price gets volatile, then brokers have an opportunity to make an extraordinary amount of money at shareholders’ expense,” says Seigne, now a consultant. ![]() Stamp duty absorbed £1mn, but the rest ended up in the pocket of the investment bank, for a commission in effect of more than 8.5 per cent. The researchers calculated that Royal Mail spent £200mn on its 2022 buyback and ended up with only £184mn worth of shares. It is possible for brokers to lose money on these deals, and sometimes they do. They can also keep the VWAP high by finishing purchases quickly if prices start to fall. If prices start to rise consistently, they can dribble out their purchases over a longer period to boost the benchmark. That means the traders can massage it by buying more shares on days when prices are low and only a few when they are higher. While the daily VWAP benchmark is volume-adjusted, the average over the whole period of the contract generally is not. It used UK data because those public disclosures are more detailed, but US companies hire the same banks. The research by two Goldman Sachs alumni, Joerg Osterrieder, now a professor at Bern Business School and University of Twente, and Michael Seigne suggests the truth is much more complicated. While the company will still lose out by getting fewer shares if the price moves up sharply during the period, the bank absorbs the risk of daily swings. Its traders then decide exactly when to buy. On the surface, these accelerated share repurchase agreements look like a good deal: the broker promises up front that the company will receive a specific discount, often 0.5 per cent, on the “volume weighted average price” over a roughly four-month buying period. Rather than buying on the open market and paying a flat commission, at least 10 per cent are entering into complex contracts with brokers at the big investment banks. Boards must simultaneously maximise the number of shares they get for the company’s money, minimise exposure to market risk and keep the commissions they pay to a reasonable level.Ī new study suggests that many companies are failing on all three counts. That is not easy, as anyone who handles very large stock sales can tell you. ![]() If companies are going to repurchase shares, they should do it in an efficient and well-managed way. Whatever your view of buybacks, one principle ought to be uncontroversial. That has not stopped the US from imposing a new tax on buybacks and tightening the rules around them. A more recent UK one found no link between the use of buybacks and EPS targets. A US study concluded that 29 per cent of companies that announced buybacks did so at a time when they would have been at risk of missing EPS expectations without them. And shrinking the share count should make it easier to earn bonuses tied to earnings per share. If stock prices rise after buyback announcements, that creates an opportunity for short-term investors to turn a profit. They all hope that shrinking the total register will boost the value the market ascribes to each share.Ĭritics worry that both groups are trying to feather their own nests at the expense of workers or long-term investment in growth. Corporate executives argue that they are not only a tax-efficient alternative to dividends, but can also signal that the company is underpriced. Few business strategies inspire as much debate as share buybacks.Īctivist investors often demand them as a quick way of getting cash back to shareholders that would otherwise be wasted. ![]()
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