What is a Stock Repurchase?

A stock repurchase, also known as a share repurchase, is a move by a company to buy back some of the stock that it has issued. The company can opt to retain the shares it buys back for future distribution or it can retire them. There are a number of reasons why a company may engage in a stock repurchase and such events are often profiled in the media when a major company is involved, or something about the repurchase arrangement is unusual.

One way to manage a stock repurchase is to simply buy back stock on the open market. Companies can also make a tender offer, alerting people to the fact that they want to buy back stock, and offering a price and set number of shares desired. Members of the public who own stock and are willing to meet the price can sell their stock to the company until it has purchased the desired number of shares, at which point the offer is over.

Dutch auctions can also be held for a stock repurchase. In this type of auction, a company announces that it wants to buy shares, and invites sellers to tender their asking prices. These prices are graphed on a curve, and the company determines the most favorable sales price. This can sometimes provide more fair pricing for one side or the other, depending on current market conditions that influence potential sellers.

Once a stock repurchase is complete, the value per share increases. People who hold on to their stock can experience an uptick in the value of their portfolios as a result. In addition, members of management with compensation tied to per share value will benefit from the increase in value. A stock repurchase can help address concerns that a company's stock is undervalued by making it more scarce, increasing demand, and raising the value.

Companies must be careful during a stock repurchase to ensure they still meet the standards for listing on a stock exchange after the sale is complete. These standards usually include capitalization requirements, as well as requirements about the amount of available stock. A poorly managed repurchase can disrupt the standing of a company's listing. Companies are also careful about the pricing. They must pay a premium to provide an incentive to sell to them rather than to buyers on the open market, while avoiding payments of excessive amounts.