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.

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  4. Why are stock buybacks so controversial?

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  5. What companies will typically exercise buybacks, and why do they do it?

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