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Is a Share Buyback Right for Your Company?

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Justin Pettit is a partner at Stern Stewart & Company, a consulting firm specializing in value-based management. This article was published in the April 2001 issue of Harvard Business Review.

"Share buybacks have become commonplace in the business world." But most of us do not really know what they are and how they work. In this article, Pettit provides an extremely clear introduction into share buyback. He starts with explaining how buybacks affect a company's value: Firstly, as a signal about the company's prospects and plans, and, secondly, through changing the company's capital structure. The amount of shares a company should repurchase depends on the purpose of the buyback. In the case to change the capital structure, the number of shares is a function of the company's market value, its share price, and the percentage of debt a company wants to reach. If the goal is to send a signal to investors the yardstick for deciding the size of buybak is its materiality level, "a number that measures the impact the buyback will have on the wealth of shareholders who keep their shares." Pettit then explains three ways to repurchase their shares: Open-market share repurchases, fixed-price tender offers, and auction-based tender offers. Each method is discussed in detail with clear examples.

Yes, I do like this article. It is very descriptive and therefore very useful for people who are looking for quick insights into share buybacks. The article is very useful for beginners into this issue, although some basic corporate finance knowledge is required. For people who like this type of articles, I also recommend Bob Zider's 1998-article 'How Venture Capital Works'. The author uses simple business US-English.