- Chapter 18.ppt

?2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - - - - - - - - Chapter 18 - - - - - - - - Share Repurchases Introduction Share repurchases are cash offers for outstanding shares of common stock Share repurchases change the book capital structure of the firm by reducing the amount of common stock Effects on leverage ratio Leverage ratio increases because the amount of common stock is reduced Leverage ratio is magnified if excess cash, which is used to extinguish common stock, is no longer deducted from debt to measure leverage ratio If additional debt is used to buy common stock, similar magnification of leverage ratio The Use of Share Repurchases Share repurchases have increased in absolute terms Repurchases increased from $0.3 billion in 1980 to $236.2 billion in 1998 Repurchases have grown at a compound annual rate of 29.9% per year Share repurchases have increased relative to the use of dividends Repurchases were a 0.5% percentage of cash dividend payouts in 1980. By 1998, it was 84.6% Between 1980 and 1998, cash dividends grew at a rate of 8.7% per year compared to 29.9% for share repurchases For the SP 500 companies, share repurchases have exceeded cash dividends beginning in 1997 Some factors in the growth of share repurchases Tax savings Cash dividends subject to maximum individual tax rate of 39.6% Returns of cash from share repurchases may qualify for long-term capital gains rate of 20% Timing of taxes Shareholders can choose whether or not to participate in a buyback program Shareholders can choose to defer tax payments Management incentives Share repurchases increase the percentage ownership of the firm for nonparticipants such as officers and directors Incentives of officers and directors to think as owners will be strengthened Reduce agency problems Management responsibility Returning excess cash to shareholders may demonstrate that officers and directors acted in the best interest of shareholde