Buyback strategy and implementation

Buyback Strategy

Stock buyback can be beneficial for both the company and shareholders if it is well thought through and beneficial for all involved. Managers can for example increase their company's share price, benefiting existing investors and raising expectations regarding the performance of their stock. Under certain circumstances this is therefore a good strategy to provide potential investors with a signal regarding the stock options at the company. It can also benefit investors in terms of receiving returned cash efficiently. This is however only true if there is a genuine higher value in the stock than currently indicated by the market price.

This is however not always the case, as there may be many reasons why a company would wish to buy back stock. It could for example mislead investors into believing that the stock is worth more than is actually the case. Indeed, an increasing amount of companies have begun to include buyback options as a strategy in their business. Some even do so to inflate the prices of their stock in order to buffer a weak market or to increase financial leverage. It is therefore important to critically assess the motivations for buyback strategies; some companies do not serve the interests of their investors as much as their own. Furthermore, when stock is bought back, it means a decrease of stock available to investors, which results in bull markets. Other companies buy back stock to allow an increase of stock options for their employees, with the result of fewer stock available for investors.

While some buyback strategies may therefore benefit investors, this is not always the case in all circumstances, and investors need to be extremely critical when reviewing their stock options in the light of this. In some cases it is best to avoid investing, while in others a buyback strategy can provide a good indication of increased value expectation.

2. Agency problems could relate to a company's internal and external image. Internally, employees who receive benefits from buyback stock may be disadvantaged in terms of value. While stock may be used instead of monetary motivation, management may inflate the value of these and gain more from employees with less investment. Furthermore, a buyback strategy may result in a negative external business image for the company when stock is later revealed to be of lower value than merited by the buyback price.

3. I believe that stock buybacks are indeed a strategy. A strategy can be defined as a plan of action to further the business advantage and image of a company. As seen above, while the strategy may be to the advantage or disadvantage of the investor, it is always used to the advantage of the company buying back stock. Some companies include this strategy as part of their yearly business plan and projections for the future. The disclosure of buying back strategies can also be used as a tool to encourage future investments. As such, it is an action to further the company's business advantage, which could then be classified as a strategy.