What is an Accelerated Share Repurchase - ASR
What is an Accelerated Share Repurchase - ASR
An investment strategy by which a publicly-traded company buys back its outstanding shares from the market for its own benefit. It is also known as accelerated buyback.
Accelerated Share Repurchase Details
Since a share buyback brings down the number of outstanding shares, it elevates earnings per share (EPS). When the EPS is high, it raises the value of the shares remaining in the market. After the buyback, the company holds the shares as treasury shares or canceled. Therefore, they are no longer outstanding or held publicly.
A share buyback has a significant influence on the financial statements of a company in several ways. A share repurchase reduces the amount of cash available in a company. As a result, it shows a decrease in the amount the company spent on the repurchase on the balance sheet.
The share buyback also decreases shareholder's equity by a similar amount on the balance sheet's liabilities column. Shareholders who want to know the amount of money corporate has spent on share buyback can access the information in their quarterly income reports. The length of a share repurchase program depends on the number of shares that a company can buy or the program's size. They can generally be pushed up to a year or more to gain more flexibility and align with the existing laws and regulations.
Accelerated Share Repurchase Real World Example
Mead Johnson Nutrition (MJN), a company based in America that deals in baby healthcare products, encountered a drop in its market value in 2015. Between August 7th and September 25th, there was a decline of 20% in their share market value. Shareholders lost about $3.4 billion. When a company experiences a substantive decline in share value, there are usually two options if the company resolves to repurchase, like in MJN's case.
The first option is usually to activate the average buyback plan, where they would purchase a set number of shares that traded each month, week, or day. The second option would be to take advantage of the accelerated buyback plan by approaching an investment bank and instantly purchasing many shares. MJN chose the second option. They first approached an investment bank (Goldman Sachs) to notify them about their intention to repurchase their shares outstanding.
The investment bank then acted as a middleman. They surveyed all their customers who had shares in MJN. The customers may include rich people, hedge funds, retail investors in the bank's mutual funds, or other companies. The bank intended to determine whether they could get sufficient shareholders ready to lend their MJN shares for an agreed length of time. After that, Goldman Sachs would borrow shares and offer them to MJN for a particular amount of dollars. In the end, MJN would surrender the shares and reduce its shares outstanding.
Significance of an Accelerated Share Repurchase
With the rising number of businesses considering share repurchase, it seems that directors have realized the positive effect of buybacks on their companies and shareholders. The following are reasons a company may resort to buying back its own shares:
- Make use of undervalued share price
- Strengthen financial ratios
- Increase ownership and lower dilution
The shareholders who choose to surrender their shares for repurchase also benefit indirectly since the overall aim is to increase its share value. The strategy is that, by removing shares from circulation, the remaining shares' price will be high. The shareholders have a say in the company's profits, which is a catalyst for the stock value if the future profit potential is positive.
Share Repurchase versus Dividends
Both share repurchase and dividends are strategies for a company to create revenue for its shareholders. However, dividends are current payoffs to investors, while share repurchase is a future payoff. Share repurchases are an excellent strategy to build shareholders' wealth over time, but they face more uncertainty than dividends.