Share repurchase and supporting stock price

CFA Level I Corporate Finance
#1

All,

If the company wants to support its stock price when the markets are declining, why is it that an open market repurchase plan should be executed? Can someone please explain this to me?

Thanks in advance.

#2

If the company starts to purchase the shares that means the demand will increase. If demand increases, we expect share price to increase as well (supply and demand relationship)

#3

I am sorry - I didnt phrase the question properly.

Why would the company repurchase in an open market vs. doing a tender offer for share repurchase or a Dutch auction? Any help please?

Thanks in advance.

#4

It’s probably cheaper.

#5

Ok - but, how will I know the cost levels? Is there anything we know from heuristics? This one is derived from an official question (EOC)? If you want, I can write the full question on the board.

Thanks in advance

#6

Tender offer is mostly conditional- for e.g. Acquirer offer 20% premium above maket price for the target amount of acquired shares s/he want to acquire (say 100,000shares); if on D day total no. of shares tendered by existing shareholders is less than 100K; the deal is off. Well, shareholders are not homogenous (as in their mentality); some are more sophiscated than the others…

#7

Unfortunately, this still doesn’t answer my question — how will I know the selling price in a repurchase in an open market vs. doing a tender offer for share repurchase or a Dutch auction?

#8

A tender offer is usually at a premium(to attract repo), like a fixed price, all who are interested tenders their shares for repurchase., since like you said, the market is declining, price in the market would be low, dutch auction, there would be an auction dutch style in which the shares would be repurchased.

#9

Ok - to summarize this — the company will go with open market repurchase plan because it will be cheaper, as compared with Dutch, where the final price will not be known, or with Tender offer, where the price will have to be at a premium – something the company won’t want for repurchasing the shares.

Is this correct? Can any expert confirm our understanding? I would appreciate any help.

Thanks in advance.

#10

Not always the case; as there is also a limit to how much you can repurchase in the market before your actions become significant to the rest. Generally, open market might be cheaper for a certain level of shares.

#11

But this is an official CFA question…I don’t think official answers are based on generality. They have to be true. Let’s wait for an expert to confirm.

#12

Bumping again, with a hope that an expert would help.