Leveraged Buyback


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.

BREAKING DOWN '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.

  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 ...
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