How accelerated share repurchases work
Traditional share repurchase programs take time to complete. During that time, a company's share price can move significantly, so a company that wants to repurchase shares can't always get its desired price for the stock.
An accelerated share repurchase program allows a company to expedite a buyback. The company will hire a bank to facilitate the repurchase of a specific amount of shares, which it will pay for upfront. The bank will then borrow shares from institutional investors like pension funds, mutual funds, and insurance companies, effectively shorting the stock. It will send those shares to the company. The bank will subsequently buy shares on the open market and cover its short position by returning the borrowed shares.
It often takes time to finalize an ASR. An investment bank will usually deliver most of the shares immediately. However, it will often take a few weeks or months to complete the transaction and hand the remaining shares to the company. The investment bank will either get paid a set fee for facilitating the ASR or will get to keep some of the stock it obtained for its client as payment.
The benefits of an accelerated share repurchase
Accelerated share repurchases have many benefits for a company and its investors, including:
- Quickly returning excess cash to shareholders.
- Swiftly capitalizing on an undervalued share price.
- Buying back a meaningful block of outstanding shares at a set price.
- Delivering a significant reduction in outstanding shares, which can lead to a noticeable increase in earnings per share.
- Providing a lift to the share price.
