Leveraged Buyback

AAA

DEFINITION of 'Leveraged Buyback'

A repurchase of a significant amount of shares through the use of debt financing. A company may undertake a leveraged buyback in order to raise share prices (if a partial buyback), to avoid over-capitalization, to take a public company private or to protect a company from a hostile takeover.

INVESTOPEDIA EXPLAINS 'Leveraged Buyback'

A company’s announcement of a leveraged buyback often has the effect of increasing share prices. This effect is generally confined to the event window, and may only last for a short period of time. At this point some investors may take advantage of price fluctuations and may sell, but are not required to sell shares to the company attempting to buy shares back.

Because a leveraged buyback involves a significant number of shares, companies have to determine what share price existing shareholders will want in order to sell. This calculation takes into account both the current value of the company, as well as a discounted premium of the future gains shareholders may gain if they choose not to sell. The difference between the current share price and the price proposed by the company is called the premium. As an alternative to a fixed price tender, a company may also enter into a Dutch auction.

A company may buy back shares if it has sufficient cash reserves but lacks capital investment opportunities, or if overall company financial performance has lagged. Some critics question buybacks that are made simply because a company may have a lot of free cash on its balance sheet. They argue that the company may ultimately do more self-inflicting damage by repurchasing stocks at inflated levels only to see the share price drop soon after the buyback.

RELATED TERMS
  1. Outstanding Shares

    A company's stock currently held by all its shareholders, including ...
  2. Hostile Takeover Bid

    An attempt to take over a company without the approval of the ...
  3. Retail Repurchase Agreement

    An alternative to regular savings deposits. Under a retail repurchase ...
  4. Term Repurchase Agreement

    Under a term repurchase agreement, a bank will agree to buy securities ...
  5. Reinvestment

    Using dividends, interest and capital gains earned in an investment ...
  6. Reverse Repurchase Agreement

    The purchase of securities with the agreement to sell them at ...
RELATED FAQS
  1. No results found.
Related Articles
  1. Home & Auto

    Leveraging Leverage For Bigger Profits

    Leverage is like fire. Find out how to use it to heat up your investing without burning your portfolio.
  2. Investing Basics

    Impact of Share Repurchases

    Share repurchases can have a significant positive impact on an investor’s portfolio and are a great way to build investor wealth over time.
  3. Mutual Funds & ETFs

    Reinvesting Capital Gains In Leveraged Portfolios

    Don't get forced into action. Learn how to plan properly to avoid making rash decisions.
  4. Options & Futures

    Leveraged Investment Showdown

    Margin loans, futures and ETF options can all mean better returns, but which one should you pick?
  5. Options & Futures

    Why Leveraged Investments Sink

    This powerful tool can have you swimming in money or drowning in underwater equity.
  6. Forex Education

    Forex Leverage: A Double-Edged Sword

    Find out how this flexible and customizable tool magnifies both gains and losses.
  7. Bonds & Fixed Income

    Leverage Your Returns With A Convertible Hedge

    Find out how you can maintain your income stream by using this type of bond strategy.
  8. Options & Futures

    Leveraged ETFs: Are They Right For You?

    This specialty vehicle offers dramatic results, but can also magnify risk.
  9. Retirement

    The Leverage Cliff: Watch Your Step

    Understanding your risk tolerance level can save you a lot of grief and financial instability in the future.
  10. Active Trading Fundamentals

    Trade Takeover Stocks With Merger Arbitrage

    This high-risk strategy attempts to profit from price discrepancies that arise during acquisitions.

You May Also Like

Hot Definitions
  1. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  2. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  3. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  4. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  5. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  6. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
Trading Center