Repurchase: Overview, definition and example
What is a repurchase?
A repurchase refers to the act of a company or individual buying back its own securities, such as stocks, bonds, or other assets, that were previously issued or sold to others. In the context of stocks, a repurchase is often referred to as a "buyback," where a company buys back its own shares from the open market, usually to reduce the number of outstanding shares, increase the value of remaining shares, or make the company more attractive to investors. Repurchases can also occur in other contexts, such as when a seller buys back a product or asset from a purchaser.
For example, a company may repurchase shares of its stock to return excess cash to shareholders or to increase the value of its remaining shares.
Why is repurchase important?
Repurchase is important because it can serve multiple purposes for a company, including increasing shareholder value, improving earnings per share (EPS), enhancing financial flexibility, or signaling confidence in the company’s future prospects. By reducing the number of shares outstanding, repurchasing shares can increase the value of each remaining share, benefiting existing shareholders. Repurchases can also be used as a tool for managing capital structure and deploying excess cash in a manner that provides a return to shareholders.
For investors, a repurchase can be a positive indicator, signaling that the company believes its shares are undervalued. It can also provide opportunities to sell shares back to the company at a favorable price.
Understanding repurchase through an example
Imagine a technology company, XYZ Corp, which has excess cash on hand and a stable financial position. The company’s board of directors decides to repurchase 10% of its outstanding shares from the open market. By doing so, the company reduces the number of shares in circulation, which can increase the earnings per share (EPS) for remaining shareholders, and potentially increase the stock price due to the reduced supply.
In another example, a car dealership might offer a repurchase program where customers who buy a new car can later sell it back to the dealership at a guaranteed price after a certain period. This allows customers to repurchase or trade in their vehicles if they no longer wish to keep them.
An example of a repurchase clause
Here’s how a repurchase clause might appear in a contract or agreement:
“The Company reserves the right to repurchase up to 5% of its outstanding shares in the open market at prevailing market prices during the next twelve months, subject to applicable regulations. The repurchased shares will be held in treasury or retired to reduce the total shares outstanding.”
Conclusion
A repurchase is a strategic action taken by a company or individual to buy back previously issued securities or assets, usually for reasons such as increasing shareholder value, improving financial performance, or capital management. Repurchase actions can positively impact stock prices, earnings per share, and investor confidence. Whether for stock buybacks or other assets, repurchasing provides a company or individual with a way to adjust their financial position and achieve specific business goals.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.