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 Articles
  1. Leveraging Leverage For Bigger Profits
    Home & Auto

    Leveraging Leverage For Bigger Profits

  2. Impact of Share Repurchases
    Investing Basics

    Impact of Share Repurchases

  3. Reinvesting Capital Gains In Leveraged ...
    Mutual Funds & ETFs

    Reinvesting Capital Gains In Leveraged ...

  4. Leveraged Investment Showdown
    Options & Futures

    Leveraged Investment Showdown

Hot Definitions
  1. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  2. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  3. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  4. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
Trading Center