What Is an Accelerated Share Repurchase (ASR)?

An accelerated share repurchase (ASR) is an investment strategy where a publicly-traded company expeditiously buys back large blocks of its outstanding shares from the market by relying on a go-between investment bank to facilitate the deal. To initiate such a campaign, a company must first furnish upfront cash to the investment bank. It must then enter into a forward contract, which is simply an agreement between two parties to purchase or sell a security at a future date, for a predetermined price. The investment bank, in turn, borrows shares of the company from individual investors on the market, in order to subsequently funnel those shares back to the company in question. Companies typically engage in ASR programs when they believe their stock shares are undervalued because this process tends to ultimately inflate the stock's value.

Key Takeaways

  • An accelerated share repurchase strategy can facilitate a speedier stock buyback at a more predictable price.
  • The company achieves this by using an investment back as a go-between to facilitate the transaction.
  • The bank borrows the shares and sells them to the company for a set price per share.

Although the process initially reduces the company's outstanding share count, over time, the shares are eventually returned to the lending parties, by the investment bank, through open market transactions.

Example of an ASR

Consider a successful company that wishes to quickly reduce the number of outstanding shares floating around in the open market. If that company took the traditional route of periodically executing direct share buybacks, the price it would pay per share would vary, depending on the day it bought back shares. But if the company instead relied on an accelerated share repurchase program to gobble up a bundle of stocks all at once, by buying those shares from an investment bank intermediary, the company and the bank could dictate the terms in a way that mutually benefits both parties. This method eliminates pricing uncertainties for the company while allowing the bank to pocket handsome fees. But the bank faces a degree of risk, in that it can never be sure of the price it will be able to command when re-selling shares back to investors.

Investor Advantages

To investors, stock buyback events indicate that the company has ample cash on hand, which it's willing to use to reward shareholders. For this reason, accelerated share repurchase programs generally benefit participating investors for several reasons. Firstly, the completion of this process can radically reduce the outstanding shares in the world, which spike earnings per share of stock still in circulation. Secondly, the price of the stock should theoretically begin rising because the stock becomes more attractive to investors, thereby increasing demand.

Creating Control

Accelerated share repurchases programs don't just serve to raise a stock price. They also enable companies to swiftly consolidate ownership. Simply put: with each share of stock a company issues, it must likewise extend an ownership stake in the business to the shareholder who made the investment. This effectively lets investors influence a company's financial and business decisions. But by depressing the number of shares outstanding, the company can amplify its control when making key strategic moves.

A stock buyback benefits investors because the reduced number of shares outstanding typically increases share price over time.