Share buyback

As well as issuing new shares, companies sometimes buy back existing ones. In Britain, shares that are bought back are cancelled, which reduces the issued ordinary capital. In the US, companies are allowed to buy back their own shares and hold them as treasury shares, reissuing them later.

The simplest reason behind a company buying back its shares is that it feels they are too cheap. By reducing the amount of shares there are, the price improves as investors chase after fewer shares.

Another reason is that when a firm has a cash surplus it might prefer to return some of it to the shareholders than get rid of some of the cash by making an unnecessary acquisition. In the UK, buybacks require shareholder approval.

Merryn

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