Why is a company offering to buy back their stock higher than value?

[DcifrThs]

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Fly:

The reason companies buy-back stock is because they have too much cash and they don't know what to do with it. This is generally a signal that the Company is flattening out and doesn't expect huge growth in the future.


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I hate generalizations like this. What academic textbook did you quote it from?

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so what is your answer to the OP's question:

"why is a company offering to buy back their stock @ higher than mkt value"?

personally i think the answer is obvious: they hate money.
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Barron

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Fly:

The reason companies buy-back stock is because they have too much cash and they don't know what to do with it. This is generally a signal that the Company is flattening out and doesn't expect huge growth in the future.


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I hate generalizations like this. What academic textbook did you quote it from?

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so what is your answer to the OP's question:

"why is a company offering to buy back their stock @ higher than mkt value"?

personally i think the answer is obvious: they hate money.
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Barron

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Well the comment I responded to and OP's post really concern two different topics (at least I think).

I can name 5 different companies off the top of my head that recently bought back shares and expect to grow EPS over 20% next year.

[MatthewRyan]

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Fly:

The reason companies buy-back stock is because they have too much cash and they don't know what to do with it. This is generally a signal that the Company is flattening out and doesn't expect huge growth in the future.

Home Depot is basically played out - they have no more room to add stores and thus growth will slow and track the general economy. The Street did not like their wholesale strategy and they are trying to unload that side of the business.

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the exact opposite could also be true: that they expect huge growth and want to bet every dollar they have on it

[Groty]

Sounds like a dutch tender. Here's a summary.

http://www.gabelli.com/Gab_pdf/articles/DTA042103.pdf

[midas]

In responding to the original post I actually forgot to answer the original question - why buy back at a higher price?

When a company decides to buy their own stock back they generally believe it's undervalued and have no better investment options with their cash. There are 2 ways to buy back stock - open market purchases or tender offer.

If a company just wants to send a postive signal to the market or buy a small amount of shares, they buy their own stock in the open market. They usually buy very small amounts per day so as not to influence the price of the stock. This is very inefficient and the company may not achieve the desired amount of share repurchase.

If a company wants to acquire large amounts of shares in a short period - it announces a tender offer and thus solicits shares directly from investors (especially large holders) and avoids the public stock markets. In order to incent large shareholders to sell, the company sets the tender price above the current market price hoping to get the opportunity to buy large amounts of shares quickly.

No textbook answer, investment banking 101.

[NajdorfDefense]

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Shouldn't arbitrage drive the price up to the tender offer minus transaction costs?

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minus PV, minus risk adjustments

[NajdorfDefense]

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Fly:

The reason companies buy-back stock is because they have too much cash and they don't know what to do with it. This is generally a signal that the Company is flattening out and doesn't expect huge growth in the future.

Home Depot is basically played out - they have no more room to add stores and thus growth will slow and track the general economy. The Street did not like their wholesale strategy and they are trying to unload that side of the business.

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the exact opposite could also be true: that they expect huge growth and want to bet every dollar they have on it

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This is generally the case. When opening new stores = 15% return, but using cash and levering up if market is expecting 5% growth, buying shares will certainly get the biggest boost - with balance sheet effects of course.