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. Then, it must enter into a forward contract with the institution, which is an agreement between two parties to buy or sell a security at a future date.
The investment bank, in turn, borrows shares of the company, typically from institutional investors such as mutual funds, insurance companies, and pension funds. The investment bank subsequently funnels those shares back to the company in question. Companies typically engage in accelerated share repurchase (ASR) programs when they believe their stock shares are undervalued because this process tends to inflate the stock's value.
- An accelerated share repurchase (ASR) is when a publicly-traded company buys back large blocks of its outstanding shares using an investment bank to facilitate the deal.
- Companies typically engage in accelerated share repurchase (ASR) programs when they believe their stock shares are undervalued.
- ASR programs often benefit investors by causing an increase in the earnings per share (EPS) of the stock still in circulation.
- An ASR program can also help a company quickly consolidate its ownership, making it easier for the company to decide on key strategic moves.
How an Accelerated Share Repurchase (ASR) Works
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.
Additionally, share buyback programs can take time to complete. According to the Securities and Exchange Commission (SEC), if the company makes a tender offer to its shareholders to buy back shares, it must keep the offer open for at least 20 business days after it begins.
But if the company instead relied on an accelerated share repurchase program to gobble up a bundle of stocks all at once by purchasing 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 reduces some of the pricing uncertainties for the company while allowing the bank to pocket handsome fees.
An investment bank faces a certain 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.
Benefits of an Accelerated Share Repurchase (ASR)
Investors view stock buybacks as indicating that a company has ample cash, which it's willing to use to reward shareholders. For this reason, accelerated share repurchase programs are viewed by many investors as beneficial.
A stock buyback can radically reduce the outstanding shares on the market, which spikes the earnings per share (EPS) of stock still in circulation. The stock price should theoretically continue rising because the stock becomes more attractive to investors, thereby increasing demand.
A stock buyback is believed to benefit investors because the reduced number of shares outstanding typically increases share price over time.
Accelerated share repurchase programs don't just serve to raise a stock price. They also enable companies to consolidate ownership swiftly. For example, with each share of stock a company issues, it must likewise extend an ownership stake in the business to the shareholder who bought the stock. If the stock comes with voting rights, the ownership share 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 vital strategic moves.
Another consideration for share repurchase programs—starting in 2023, the federal government is imposing a 1% excise tax on companies conducting share repurchases that meet specific criteria. Repurchases will not be taxed if:
- The repurchase is part of a reorganization with no losses or gains recognized by shareholders.
- The stock or value of stock repurchased is contributed to an employer-sponsored retirement or employee ownership plan.
- The total repurchase value in one taxable year is less than $1 million
- The company is a registered investment company or real estate investment trust
- The repurchase is treated as a dividend for tax purposes
- The repurchase is conducted in ordinary business by a dealer in securities
Example of an Accelerated Share Repurchase (ASR)
On Aug. 19, 2020, Intel Corporation announced it was entering accelerated share repurchase agreements to repurchase $10 billion of its common stock. International banking group BNP Paribas Securities Corp. acted as the structuring adviser to Intel on the ASR agreements.
According to the terms of the ASR agreements, Intel agreed to receive approximately 166 million shares initially. The total number of shares to be repurchased by the company would be based on the volume-weighted average price (VWAP) of the company's common stock during the term of the agreements. This would be subject to adjustments and a discount. The final settlement would occur by the end of 2020.
According to Intel CEO Bob Swan (at the time), a key driver for the share repurchase was the company's belief that the shares were trading well below their intrinsic valuation. Strong operating results in 2020 meant the company could fund the share repurchases with existing cash, allowing the company to return capital to stockholders through repurchases and dividends.
Frequently Asked Questions
Why Would a Company Do an Accelerated Share Repurchase?
Compared to share repurchase programs, accelerated share repurchases makes the process quicker. It can be used to avoid hostile takeovers or quickly adjust share prices to intrinsic value.
What Is an Accelerated Share Repurchase?
An accelerated purchase is when a company uses an investment bank to repurchase shares quickly. The company loans money to the bank, which borrows the shares from institutional investors. The bank returns the shares to the company, then buys shares from investors on the open market and gives those shares to the institutional investors as replacements.
How Do Banks Make Money on Accelerated Share Repurchases?
Investment banks make money by charging fees for accelerated share repurchases. Some agreements between banks and companies include a discount for the bank.