We all have heard about buy back of shares i.e. company buying back the shares that it has issued in the market
and reducing the supply of the same in the market. It can be done by companies
for many purposes like to increase the price of shares by reducing the supply
so as to meet the requirements of the index in which it is listed, to give away
the excess cash to its shareholders etc.
How right is it to buy back
shares? Does it indicate anything that should be probed further regarding the growth
of the company? Is giving cash back to shareholders only option to retire that
cash?
We all are aware of huge cash
piles of many IT companies. Companies return this cash to shareholders when they
don’t have investment options, in the form of huge buyback program or dividends
etc. with a view of maximizing shareholder value or value creation or wealth maximization
whatever we call it. We all know about the Apple’s buyback
program as well. Apple has raised only $97 million in the form of IPO from the public
till now in 1980 and post that it was all the company’s magic which has created
so much wealth to the company! Innovation seems to be the only word which can
describe Apple and the value of it. The I-phone maker spent $18 billion on its
own shares from January to March in buy back and rallied close to 32% after a
$16 billion buyback in 2013.
Does this buyback program indicate
stagnation of business in any way because it is not having options to invest?
Does this return really create shareholder wealth? Don't know. Need to probe further!
I was reading a blog of HBR,
where the author brings up an interesting point as to whether creating
shareholder’s wealth is really significant? Do those investors really invest
for the purpose of creating value? Author seems to slightly dislike the concept
of maximization of shareholder value because the investors don’t directly invest
in any value creating capabilities of the company. They buy shares of the company
in the market with a feeling that stocks might go up and that creates wealth
for them with market price appreciation.
As against those investors if we
think of workers or government, they actually are part of value creation for a
company because the workers with skill sets contribute to success of the company
and government by providing infrastructure and various other facilities is also
a part of value creation in the company. So the companies instead of
returning the cash to shareholders can make use of the cash in creating some
value for these holders instead of investors who trade in the shares that are
floated in the market.
The author very nicely suggests
few measures which the company can take up to make use of the excess pile of
cash. Some of them are, educating
employees of the organization by sponsoring courses which employees themselves
cannot afford to have. A tuition
assistance program for the employees would be very good measure to make use
of this cash. Companies can also do social
investment which can be in any field which the country is lacking, may be
education, infrastructure, poverty etc. It makes the corporate a social citizen
as well. It can also invest in social
innovation by encouraging youth or smart brains of the country to come up
with ideas that would make a difference in the society. These kind of actions
would be more appreciated by the investor community than buying back shares and
causing market value appreciation.
