buy back & delisting

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Buy Back & Delisting

Author: vikash-jha

Post on 12-Apr-2017



Economy & Finance

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Buy Back & Delisting

Buy Back & Delisting

Buy Back

The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares in the market. Companies buy back shares either to increase the value of the shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake.In a buyback program, the shares are bought back by the company itself and the shares bought back are extinguished. This leads to a REDUCTION of capital for the company.Stock buyback programs take advantage of supply and demand by reducing the number of shares outstanding, increasing EPS, shareholder value, float and ultimately the price of stock.

How Buyback is done?

Tender offer : Shareholders may be presented with atender offerby the company to submit, or tender, a portion or all of their shares within a certain time frame.

The tender offer will stipulate both the number of shares the company is looking to repurchase and the price range they are willing to pay. When investors take up the offer, they will state the number of shares they want to tender along with the price they are willing to accept.

Once the company has received all of the offers, it will find the right mix to buy the shares at the lowest cost.

Open market : The second alternative a company has is to buy shares on the open market, just like an individual investor would, at the market price. It is important to note, however, that when a company announces a buyback it is usually perceived by the market as a positive thing, which often causes the share price to shoot up.

Why companies buy back?Excess cash: Consider acompany which possesses huge cash reservebut has no upcoming projects to invest into. In that case thecompany may plan to invest in itselfand offer the existing shareholders an option to sell their shares to the company at an attractive price.

Undervalued stocks: A company may also go for buybacks with anaim of projecting better valuation of their stockswhen they think it is undervalued in the market. The reason is companies buy its shares at higher price than current market price which indicates that its worth in the market is more than the present value.

Dilution: Another reason that a company may move forward with a buyback is to reduce thedilution that is often caused by generousemployee stock options plan.

Capital structure: Some companies may also use it as atool to change their capital structurei.e. debt-equity ratio in specific. By buying back the shares from open market, a company may increase its reliance on the debt financing rather than equity financing.

Improving Financial ratios: Share buybacks reduce the number of shares outstanding. Once a company purchases its shares, it often cancels them or keeps them astreasury sharesand reduces the number of shares outstanding, in the process.

Tax benefit: When excess cash is used to buyback company stock, in lieu of increasing or paying dividends, shareholders often have the opportunity to defer capital gains AND lower their tax bill if the stock price increases.

Potential PitfallsManipulation of Earnings :Companies could buyback shares and appear to beat consensus estimates that were based on a larger number of outstanding shares.Execution of Buyback: A buyback announcement may initially boost the price of a stock, but this phenomenon (when it occurs) is usually short lived.

APPLE INC.Apple Inc., formerlyApple Computer, Inc., is amultinational corporationthat createsconsumer electronics, personal computers, computer software, andcommercial server, and is adigital distributorof media content.It was established on April 1, 1976, bySteve jobs,Steve WozniakandRonald Wayneto sell theApple Ipersonal computer kit.Apple originally went public on December 12, 1980, with anIPOat US$22.00per share.By April,2015, Apple announced that it would increase its capital return program from $130 billion by December 2015to $200 billion by March 2017.

The Board has also approved an increase of 11 percent to the Companys quarterly dividend, and has declared a dividend of $.52 per share, payable on May 14, 2015 to shareholders of record as of the close of business on May 11, 2015.Apples quarterly dividend increased from $0.47 per quarter to $0.52 or 10.6%.Apple announced a 7 for 1 stock split. In other words every share ofAAPLwill soon become 7 shares of AAPL in order to ensure liquidity.

Reasons for BuybackPlenty of cash- At the end of last quarter, Apple had about $203 billion of cash and investments on its balance sheet which needs to be invested somewhere to return profits to the shareholder.Tax benefits- The vast majority of Apple's cash -- $181.1 billion at the end of June -- is held outside the U.S. for tax purposes which would be subjected to the repatriation tax up to 35%. Since Apple doesn't want to pay the stiff repatriation taxes, It is borrowing money to pay share buybacks hoping the government to bring down the tax through corporate tax reform.

More control over management- Buying shares back also gives board/management/company more control because there are less voting shares out in the public. Dilution- A lot of companies contract third parties and pay them in equity rather than cash. In order to pay with equity, there has to be stock available to give. A company can issue more shares, but it would dilute the stock and may adversely impact the stock price. This gives a company like Apple extra shares to use for contract work or MnA activity without risking dilution.Undervalued stocks- Buying shares back may indicate that the company believes the price of the stock is low. It reduces the amount of dividends they have to pay to outsiders and at the same time gives them the ability to re-issue those shares later at a higher price when the stock is trading much more favorably.

ImplicationsA P/E ratio of 15 and 13% increase from the buyback may result in a share price of $165.


Apple's share buyback program is estimated to increase the share price by 13%.

Apples quarterly dividend increased from $0.47 per quarter to $0.52 or 10.6%.It looks like either Apple may raise the dividend by a larger amount or has a bit of a cushion built in so that it could announce $200 billion for its capital return program.

Currently Apple is in a blackout period that lasts until the day after it announces its earnings on July 21. Thus, the company is not allowed to buy back stock. The black out period is five weeks before every earnings announcement.

DelistingDefinition: The removal of a listed security from the exchange on which it trades. Stock is removed from an exchange because the company for which the stock is issued, whether voluntarily or involuntarily, is not in compliance with the listing requirements of the exchange.The money is taken from the Promoters own account to buy back all the shares. The number of shares in general is not changed.The promoter can make a company private by delisting all the shares.


Various Reasons for Delisting:

The reasons for delisting include violating regulations and/or failing to meet financial specifications set out bythe stock exchange. Companies that are delisted are not necessarily bankrupt, and may continue trading over the counter.

Listing Requirements: In order for a stock to be traded on an exchange, the company that issues the stock must meet the listing requirements set out by the exchange. Listing requirements include minimumshare prices, certain financial ratios, minimum sales levels, and so on. If listing requirements are not met by a company, the exchange that lists the company's stock will probably issue a warning of non-compliance to the company.

If the company's failure to meet listing requirements continues, the exchange may delist the company's stock.

Switching from one exchange to other: It might see a mundane action for a company to switch stock exchanges. It happens every now and then when companies change to the Nasdaq from the New York Stock Exchange, or vice versa.

The Company becomes a private company (the company might get bought by private equity buyers or the company might want to omit the additional bureaucratic procedures that come with being listed on a stock exchange like publication and disclosure requirements)


The company (usually the legal entity) is being liquidated (for example the owners of a subsidiary company that is listed independently on an exchange might chose to liquidate the subsidiary and bring all the assets into the parent company and have only the parent company listed on the exchange).

The company declares aBankruptcy(for example a company can default on paying their debt and file for bankruptcy protection).


Process of a delisting

1. In case a delisting is initiated by the Exchange, often it will issue warnings to the company first. If the company does still not comply with the listing rules after a while, the exchange will proceed to announce a Delisting.2. If a Company decides to delist itself it has to request approval from the exchange and complete the appropriate documentation.3. The decision to delist the company has to be announced and made public.4. All shareholders will be notified and given time to think on what they want to do with the shares. (Often delisting from an exchange is followed by removal from the security from theCentral Securities Depositoryofa country and cross border settlement to another country has to be arranged).5. On the effective day of the Delisting the shares will cease trading on the Exchange and they will be booked out of the accounts of custodians, banks and broker dealers.

Effects of Delisting The financial market liquidity has a causal impact on both real and financial firm decisions.

A higher benefit will accrue to those who buy the stock earlier and hold on till after the delisting announcement.


Essar OilEssar Oilis anIndia-based company engaged in the exploration and production of oil and natural gas, refining ofcrude oil, and marketing of petroleum products. It is a part of theEssar Groupbased in Mumbai and operates amajor refineryinVadinar, Gujarat, India, which made it the second largest non-state refiner in India in 2009.Essar Oil was incorporated by the Essar group on 12/09/1989The company originally went public on December 07/02/1995.Essar oil had announced delisting from the stock exchanges on June 20, 2014.

Delisting OfferAs per the announcement, Essar Group would buy all the shares it doesn't own in Essar Oil. The number of equity shares held by public shareholders are 137.123 million or 27.53%. The promoter firm,Essar Energy Holdings(EEHL), incorporated under the laws of Mauritius, holds 71.22% stake in Essar Oil.Thefloor price has been set at Rs. 108.18. At this floor price, the Group will have to spend Rs. 14,800 millions to acquire all outstanding shares.

Delisting Progress Delisting approved by SEBI, NSE and BSE. Reverse book building process has recently received a green flag. According to BSE data, while shares of Essar Oil have been trading in the range ofRs.100-110 apiece for most of last year, the stock has soared by almost 95% in the past one month alone.

What is Reverse Book Building?A reverse book-building process is a mechanism of delisting under which shareholders tender their shares at their prices of preference. Thereafter, based on the preference of the majority of the shareholders, a delisting price is fixed. But the delisting price cannot go below a floor price already fixed by the company.

Reasons for DelistingThe company defended the delisting action with the following reply: Essar Energy Holdings Ltd (the parent of Essar Oil) believes that the company requires sustained, substantial investments to develop and grow its business (especially refining and marketing) and a full ownership will provide it with increased operational and financial flexibility to support their business and strategic needs.


The promoters planned to delistEssar Oilfrom the Indian stock markets before selling a 49 per cent stake in the company to Russian oil giantRosneft for $3.2 billion (Rs 20,480 crore).The deal would provide Rosneft access to a world-class refinery and a retail fuel chain, while Essar Oil would receive assured fuel for 10 years.

Effects of Delisting At current market price, Essar Oil is about 7.2 times its book value, which is higher than its industry peers Reliance Industries (1.6x), Bharat Petroleum Corporation (2.6x), Hindustan Petroleum Corporation (1.1x) and Mangalore Refinery and Petrochemicals (1.6x).


Stock exchange delistings are important for a functioning capital market. Going private can be used to strategically reposition the company with a subsequent IPO as and when it becomes a sensible option again.

Moreover, as financial investors usually keep an investment in their portfolio for only three to five years, one possible exit route for them is a stock market

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