Definition of accelerated buy-back

Some companies turn to a counter-intuitive strategy to return cash to shareholders: shorting their own stock.

As companies with record cash on their balance sheets who embark on a spree of share buy-backs, a handful are using a tactic not seen since before the financial crisis, known as accelerated share repurchases (ASRs) or accelerated buy-backs (ABB).

In a traditional buy-back, the company uses a broker to buy shares on the open market. It can take weeks or months to complete an announced buy-back.

But with an accelerated repurchase, the company asks their broker to short the full amount immediately. In a standard short, the broker borrows shares from other holders, sells them, then later buys shares to return them to the original holder.

In an ASR, the borrowed shares are not sold; the company retires them. The broker then buys shares to cover the short, with the company agreeing to cover any losses on the trade.

There are several benefits to ASRs and other “structured” buy-backs, in which companies use derivatives and other tools to engineer buy-backs to achieve pre-set price or volume targets.

Accelerated repurchases can generate a bigger short-term boost to share prices, as investors might otherwise ignore a buy-back authorisation that could take years to execute.

Some investors are wary of ASRs, as they immediately lower a company’s share count, and boost its apparent profitability on an earnings-per-share basis. 

One of the largest ASRs in 2011 was Express Scripts, a health care group, for $1.75bn. Retailer Home Depot and RR Donnelley, a printing group, have done $1bn ASRs. [1]

Accelerated buy-backs make a comeback

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