A few times a year, news will be made when companies buy back their stock. This leads many to ask, “Why do companies repurchase their stock?” As a business advisor, I know that there are a few possible reasons for partaking in this kind of business practice.
Companies Repurchase Stock for Employee Benefits
From time to time, companies come to the realization that they are running low on stock that they have set aside for their employee’s 401K, or other stock savings programs. The easiest way to replenish this stock pile (pardon the pun) is to buy back their stock.
Companies Repurchase Stock to Increase Investment
Many companies will buy back their stock in an attempt to drive up investment. For the most part, the less stock available for a company, the higher the price goes. Companies might use another excuse as to why they are repurchasing the stock, but the end result is to have the price go up, and have more people invest in them.
Companies Repurchase Stock to Prepare for a Merger
I have seen where companies have bought back their stock because they are working with another company in the hopes of a merger. This is a rare occurrence that is meant to cause unusual permutations in the stock price. This is a risky move, and is usually avoided.
Companies Repurchase Stock to Avoid a Takeover
Another popular reason for a company to buy back the available stock shares is that there might be an investor or another company that is trying to take it over by purchasing a majority stake in stocks. These people are usually called sharks and are a threat to many companies that wish to stay out on their own.
Companies Repurchase Stock to Prepare for Bankruptcy
More and more companies are buying back their stock these days as they prepare to file for bankruptcy. The stock is repurchased so that some of the stock can be used to pay off some creditors by giving them a small share in the company. It should never be figured that this is the reason for a repurchase of stock. Companies are required to state in court that this is the reason for the repurchase, and it needs to be accepted by the court and the creditors.
There are other reasons for a company to buy back open shares of stock, but these are the most common five reasons. There can be cases pointed out of other reasons for a company to buy back stock, but they are very rare, and would have to be investigated on a case by case basis.