Definition
Accelerated Share Repurchase (ASR) is a strategy used by corporations to buy back their own shares quickly by using a financial institution to handle the transactions. The corporation pays the financial institution an upfront payment, and the institution then purchases shares from the public market on the corporation’s behalf. With this method, the corporation can minimize market impact and reduce the time it takes to repurchase shares.
Key Takeaways
- Accelerated Share Repurchase (ASR) is a strategy used by a company to buy back its shares from the market more quickly by using a third party, typically an investment bank.
- ASR allows a company to transfer the risk associated with stock buybacks to the third party, usually leading to immediate reduction of share count and increase in Earnings Per Share (EPS).
- Although ASRs are generally beneficial for a company’s stock price and market value, they are often critiqued for potentially manipulating earnings metrics and for their lack of transparency.
Importance
Accelerated Share Repurchase (ASR) is a significant financial term, primarily because it allows a company to buy back its own shares quickly from the open market, which can positively influence its stock price.
An ASR is often implemented when company executives believe that the company’s stock is undervalued and that repurchasing shares would provide a worthwhile return on investment.
This practice reduces the number of outstanding shares, potentially increasing earnings per share, a key metric in evaluating a company’s profitability.
Furthermore, ASRs allow companies to fulfil their repurchase commitments even in periods of restricted trading, offering more flexibility in their repurchase programs.
In essence, understanding the concept of ‘Accelerated Share Repurchase’ is critical in financial analytics as it plays a key role in a company’s capital management strategies.
Explanation
The primary purpose of an Accelerated Share Repurchase (ASR) is to quickly reduce the number of shares outstanding and consequently increase earnings per share, serving as a quick way for a company to repurchase its own stock. Companies usually opt for this method when they believe their shares are undervalued and they have excess cash on hand.
This concept is part of a company’s share buyback program aimed at returning cash to investors without the investor having to sell shares and realize a capital gain. In an ASR, a public corporation contracts with an investment bank to buy back its shares over a period of time.
The investment bank borrows shares to sell to the company and then purchases shares in the market over the buyback period to return to the lender. The price paid to the company is typically calculated based on an agreement formula related to market performance.
This process aids in risk management for the company, as the price of the shares they pay to the bank is predetermined. The ASR also provides an immediate boost to earnings per share and usually positively impacts the company’s stock price.
Examples of Accelerated Share Repurchase
Apple Inc.: The tech titan has a long history of capital returns to shareholders. In one such example, in 2018, Apple announced an increase in its share repurchase program from $210 billion to $310 billion through March 2021, which included accelerated share repurchases. This allowed Apple to buyback their shares from the market at a faster rate than typical open market purchases.
McDonald’s Corporation: The fast food giant has used accelerated share repurchase programs repeatedly. In 2019, they used $2 billion of the proceeds they received from debt issuance to fund an accelerated share repurchase.
Alphabet Inc: In 2019, Google’s parent company, Alphabet, revealed its first-ever share repurchase program of up to $25 billion in its Class C capital stock. This accelerated share repurchase helped reduce the number of shares outstanding, effectively increasing the value of remaining shares.
FAQ: Accelerated Share Repurchase
What is an Accelerated Share Repurchase?
An Accelerated Share Repurchase (ASR) is a tactic implemented by companies to buy back a large amount of their own shares at once to the market, instead of buying back gradually. This is typically done through an investment bank.
Why would a company execute an Accelerated Share Repurchase?
A company may implement an ASR as a strategy to reduce share count, thereby increasing the earnings per share (EPS) and return on equity (ROE). It can also potentially provide support to a company’s share price during market uncertainty.
How does an Accelerated Share Repurchase work?
In an ASR, a company buys its shares from an investment bank. The investment bank borrows the shares from clients or uses its own inventory. Over time, the investment bank will purchase shares from the open market to replace those it originally provided. The average price of these shares will then determine the final cost of the repurchase to the company.
What are the potential drawbacks of an Accelerated Share Repurchase?
While an ASR can be beneficial in terms of supporting the share price and improving financial ratios, it also carries risks. These include the possibility that the shares could be bought back at a higher price than their innate value, and the opportunity cost of not investing that capital elsewhere.
Related Entrepreneurship Terms
- Buyback: Also known as a share repurchase, it is a company’s buying back its shares from the marketplace.
- Equity: In finance, equity represents the ownership interest in a company in the form of shares or stock.
- Shareholder value: This is the value delivered to the equity owners of a corporation due to management’s ability to increase earnings, dividends, and share price.
- Treasury Shares: These are the repurchased shares held by the issuing company.
- Capital Returns: This is the return on investment received by a shareholder through dividends or the buyback of shares.
Sources for More Information
- Investopedia: This site provides high-quality, accessible financial and investment education to individuals. They feature information about Accelerated Share Repurchase.
- Corporate Finance Institute: It is a reliable source for in-depth guides to important financial concepts, including Accelerated Share Repurchase.
- The Balance: This site provides expert-written articles and resources on personal finance and money management, including topics related to share repurchase.
- Nasdaq: A credible source for financial information as it operates numerous stock exchanges in the world, and they have articles covering the concept of Accelerated Share Repurchase.
