Right, companies can go private again, but doing that is a bit more than just buying up all those shares, they probably have to do a bunch of paperwork for that to happen.
My query was only theoretical : If the company did buy up itself up to the point where there is, say, just one outstanding share, what happens to the value of that last, lonely little share on the open market? Does it balloon way up, because it’s the only share available? But then don’t all those shares the company holds also balloon, because they theoretically still exist, right? Or how does that work?
Typically the company will announce that they’re going private and send each shareholder a check for the value of their stocks at a cut-off date plus a premium. This usually requires a majority of the shareholders to vote for the buyout, so they might have to offer a pretty high premium to get the votes. Then they delist the stock from the indexes and it’s private.
Should paying dividends be outlawed too, then? They “waste” money in exactly the same way stock repurchases do. But no one seems to be getting out the pitchforks for paying dividends, even though the anti-repurchase articles quietly mention that paying dividends uses the company’s money in the same way.
When a company buys shares in a repurchase, those shares are normally “retired” or cease to exist. This is what I think people don’t understand…they seem to think the company somehow ends up “owning” itself, pulling a fast one on everyone. The shares are gone; if a company repurchases half its shares, the remaining half should double in value so that the total market value of the company remains exactly the same. (This is why it’s only helpful to repurchase when the shares are low…otherwise it’s spending money to keep everything even…edit: and it’s more complicated since the act of spending that much money will decrease the share price, and also it’s an unrealistic example to have such a huge stock repurchase)
If a company bought back all but one share and retired all the others, that share would be worth the entire market value, and the holder would own the company. So the corp would never do this (since the board of directors typically personally own a lot of stock). It would be very hard to accomplish this on the open market, since finding people to sell to match the order would get harder and harder, and the price would be exploding with each successful repurchase. Not everyone lists their shares for sale, so the corp would be limited to those offered. But assuming everyone was trying to sell, except one person, the company could theoretically buy up all but one share (or one person’s shares). In that case though, they wouldn’t retire the shares they bought, unless they really hadn’t thought things through. Might make for a funny movie scenario though.
Instead of buying back all but one share, they’d buy back all the shares and take the company private, with some group of investors (typically people on the board or a major shareholder) putting up the cash, not the company’s coffers. That group of investors would own the company and any “stock” that exists would be privately exchanged among themselves, not listed any longer on the stock market.
Unless, the investors borrow most of the money they use to buy all the stock up. Then, after it’s gone private, they transfer all of the debt payback to the company to payback.
Effectively getting the company to pay for itself.
I see, thank you. It’s true that I, too, thought that the company would “own” itself. However, the next conundrum I have is if the corp wants to issues new shares, it seems that it’s able to essentially “unretire” shares just as easily, then pocket a bunch of money while diluting other shareholders’ shares, no? I would imagine this would require a vote of shareholders, at minimum.
Yes, this is exactly what I was thinking, a fine tactic employed by those stand-up “investors” called vulture capitalists.
So why don’t they just pay dividends instead of repurchasing? Dividends have to exist because in the end this is what equity is about: buying a stream of future earnings. The stock market cannot be sustained by momentum investing alone; If there is never any end game where the investors get paid for taking a risk then even the gamblers will eventually stay away.
The difference between dividends and repurchase is that dividends are the end game while repurchase is a delay of the end game. Also dividends don’t have the same implication of pricing inefficiency that supercharges the effect of repurchase.
I agree, dividends are the bedrock of the stock market, but some time in the 80s everyone decided they’d go for stock price appreciation instead, and dividends became passe. Everyone assumed the market would get along fine without the end-game, and they were right, except for a few glitches in 1987 and 2009, etc. Everyone’s bought into the game by now.
Also, when your company has no earnings yet (as in the internet go-go years), giving away cash seems a little dodgy, even more dodgy than repurchasing your high-flying internet stock I guess.
However, there are some old-school stock market people who disdain dividends, and they’re not all Ayn Rand followers. Warren Buffet doesn’t pay a dividend for Berkshire, using stock repurchases instead, as explained here:
though that article seems confused as to whether he’s retiring the shares or keeping them as treasury stock
