Accelerated share repurchases (ASRs) can boost a languishing stock and lead to a sustained rise in share price, but at what cost?
Companies that take the ASR route buy all the shares up front from an investment bank that has borrowed them from investors; the bank then buys the shares back on the market over several weeks or months to repay those investors. Companies like this approach because it allows them to demonstrate a commitment to the buyback early on and can prevent share prices from jumping before the transaction is executed.
But ASRs also provide lower returns, are more risky, and cost companies more, contends Michael Gumport of MGHoldings/SIP. Bank fees contribute, as do frequent share-price run-ups before programs are officially disclosed. Gumport also takes ASRs to task because they are excluded from a safe harbor against market manipulation, thus exposing the company to risk. And, he says, the financial reporting around them is insufficient.
Linear Technology CFO Paul Coghlan credits the ASR approach with helping his company avert a large jump in share price when it bought back $3 billion of its shares earlier this year. He also says ASRs have advantages over other buyback approaches, such as tender offers, during which a company may have to bid up the stock until shareholders relinquish enough shares. That usually results in a premium of about 15 percent, Coghlan says.