Companies that issue stocks often choose to buy back their shares for a variety of reasons. When a company decides to reacquire its own shares, it can do so via an open market repurchase or an accelerated share repurchase. An accelerated share repurchase, or ASR, is a method by which a corporate entity facilities a share buyback for its own benefit.
How accelerated share repurchases work
During an accelerated share repurchase, a corporation will buy back its own shares from an investment bank. To facilitate the transaction, the bank will borrow shares from existing shareholders or clients, and then buy back those shares to return over a period as short as one day and as long as several months.
Accelerated share repurchases vs open market repurchases
Most of the time, when companies want to buy back their stock, they do so through the open market -- meaning, they purchase those shares at the going rate, just as an individual investor would. With an accelerated share repurchase, a company can transfer the risk of buying back stock to the investment bank it's working with by offering up a fixed price for its shares in exchange for a premium paid to the bank. Because accelerated share repurchases often move more quickly than open market repurchases, they're a good way to rapidly reduce the number of shares a company has outstanding.
Why companies use accelerated share repurchases
Accelerated share repurchases can be useful for companies that believe their shares are undervalued. By reducing the number of shares outstanding, a company can actually raise each share's value by increasing demand for a limited commodity. Furthermore, accelerated share repurchases allow companies to quickly consolidate ownership. When companies issue stock, each share represents an ownership stake in the business. Having fewer shares outstanding can give companies more control over their financial decisions.
A not-so-accelerated process?
As we just learned, in an accelerated share repurchase, a company will pay an investment bank a fixed amount of money up front in exchange for shares that the bank borrows. The bank will then use that money to purchase the company's stock over a period of time, which can last for several months. These newly purchased shares are then used to replace the borrowed shares, but if there are extra shares left over, the company that initiated the repurchase gets to keep them. If the stock price falls during the repurchase period, the company will come away with more shares, but if it climbs, it will end up with fewer shares.
When we talk about accelerated share repurchases, we tend to assume that the process happens quickly for everyone involved. But while the initial shares themselves are reacquired quickly by the initiating company, from a shareholder perspective, the process can be rather slow, since the final share price that results is based on the average price of the stock over what could be a lengthy period of time.
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