Once a firm decides to redistribute cash to shareholders via a share repurchase, it has four channels at its disposal through which the share repurchases can be carried out: (fixed-price) tender offers, Dutch auctions, privately negotiated repurchases and open market share repurchases. A tender offer entails that a firm repurchases a number of shares through a one-off offer. The offer specifies the number of shares a firm wishes to repurchase, the particular price at which shares are to be repurchased and when the offer expires. A firm may also specify the minimum number of shares that must be tendered for the offer to not be cancelled. Upon notification of the tender offer shareholders decide whether the pre-specified repurchase price is deemed …show more content…
A tender offer might oversubscribe, hence the number of shares tendered by shareholders exceeds the number sought by a firm. If this is the case the firm repurchases shares at the pre-specified price from the tendering shareholders on a proportional basis. Alternatively, if the number of shares tendered is below the number of shares a firm wishes to repurchase (undersubscribed) a firm may choose to cancel the tender offer altogether or to extend the duration of the offer. One of the key attractions of a tender offer for firms is that the repurchase price is fixed. A Dutch auction resembles a fixed-price tender offer. Under a Dutch auction repurchase method the repurchasing firm determines a price range from which each tendering shareholder must select one particular price within the specified range (Gay, Kale, & Noe, 1996). At the end of the auction period the firm repurchases its shares in an ascending order based on the shareholders’ tender price until the required number of shares has been repurchased. The same price is paid to all shareholders, rather than the share price selected by the tendering shareholder. This price corresponds to the clearing bid or to the …show more content…
A privately negotiated share repurchase is the least common method of buying back shares. In a privately negotiated transaction a firm decides to repurchase shares from a major shareholder. There are two key motives why a firm might engage in a privately negotiated [7] repurchase. First, a firm might fear that a major shareholder wishes to acquire the firm and replace its management. In such a case, the firm approaches the major shareholder to acquire its shares often at a significant premium above market price (Peyer & Vermaelen, 2005). This type of transaction is called “greenmail”. Second, a major shareholder might want to sell a large number of a firm’s shares, however the market for the firm’s shares is insufficiently liquid. If the market is illiquid, selling such a large portion of a firm’s shares might induce a substantial impact on the share price. To avoid such a disruptive impact the shareholder might approach the firm and negotiate the repurchase of shares via a private transaction. An open market repurchase (program) is most commonly used to repurchase shares. According to Busch and Obernberger (2016) and Grullon and Ikenberry (2000) more