What Is an Accelerated Share Repurchase (ASR)?
An accelerated share repurchase (ASR) is a strategy that public companies use to buy back large blocks of their outstanding shares quickly, using an investment bank as a go-between. The share repurchase is usually accomplished in two steps:
- The company enters a forward sale agreement with the investment bank and pays cash for the shares upfront.
- The investment bank borrows the shares from its clients or other share lenders and delivers the shares to the company.
This immediately reduces the company's outstanding share count. Over time, the shares are returned to the lenders by the investment bank through purchases in the open market.
Understanding the ASR
When a company uses this strategy, the investment bank accepts the risk that the shares will lose value, in return for a fee paid by the company.
- An accelerated share repurchase strategy can get a stock buyback done quicker and at a more predictable price.
- The company accomplishes this by using an investment back as a go-between.
- The bank borrows the shares and sells them to the company for a set price per share.
- The bank takes on the task of buying back the borrowed shares on the open market.
ASRs are used to speed up the process of repurchasing shares and make the cost of the transaction more predictable. The number of the company's outstanding shares is reduced immediately. That means the company's earnings per share increases and the cost of the transaction can be added to the balance sheet.
Example of an ASR
Stock buybacks are popular with investors, who see it as a sign that the company has plenty of cash on hand and is willing to use it to reward shareholders. Stock buybacks often have the effect over time of boosting a stock's price.
So, say the management of a successful company is interested in reducing its outstanding share count and wants to accomplish this in a faster way than the normal strategy, which would involve periodic share buybacks in the open market.
The company might decide to execute its share buyback through a combination of open market purchases, privately negotiated transactions, and an accelerated share repurchase agreement.
In one big transaction, the company could pay over a large sum of money to an investment bank and receive in return a big bundle of its own shares for the agreed-upon price. The smaller open market purchases could be handled over the following weeks. However, the company has reduced much of the price uncertainty of the transaction by unloading one large batch of stock at a set price.
A stock buyback is seen as a plus by investors. It reduces the number of shares outstanding, and thus typically increases share price over time.
With the deal completed, the company has fewer shares outstanding. It's earnings per share immediately increases because it has fewer shares outstanding. The price of the stock should begin to rise because there are fewer shares on the market.
Accounting for an ASR
Under generally accepted accounting principles (GAAP), the forward contract that a company enters into with an investment bank is considered an equity instrument.
While the ASR is outstanding the value of the shares will fluctuate. If the shares increase in price, the company would assume the liability. If the share price falls the company would record a receivable.
However, whether it is an asset (payable) or liability (receivable), the change in the value of the forward sale agreement remains off-balance sheet. In other words, the balance sheet does not reflect the potential asset or liability value of the ASR before the ASR settles.