Companies return value to its shareholders through two ways: dividends and share buybacks. Dividends are the distribution of part of the earnings of the company as cash to its shareholders. In share buybacks, companies use excess cash on its balance sheet to buyback its own shares, which results in the decrease of outstanding shares, thus increasing the per-share value.
Does share buybacks really add value to shareholders? Some are value-accretive, while some are value-destructive, it depends on the price and timing of the buyback. But that is not the subject matter of this post.
Companies do share buybacks in two ways: through the tender offer route, and through open market purchases. This post discusses the investment potential of share buybacks done through the tender offer route. A typical share buyback through the tender offer route takes about 2 – 3 months to complete.
There are 7 companies that have announced share buybacks, so far, in 2022, and of these, 6 are through the tender offer route and the other is through the open market purchase route. James Warren Tea, K.P.R. Mills, Mayur Uniquoters, Gulf oil lubricants India, FDC, and Tata Consultancy Services are the 6 companies that have announced share buybacks through the tender offer route in 2022.
The buyback prices of all these 6 companies are at a premium to the current market prices, but does that mean buying shares in the market and then tendering in the buyback offer will guarantee good returns for the investor? It is not that simple and easy to answer.
To understand it better, let us consider the share buybacks (tender offer) of 2021. We consider the cases where the companies have spent at least ₹100 crores on the buybacks. There are 8 such companies and they are shown in the table below:
| Sl No. | Company | Offer Price Premium % | Buyback size as % of Total shares | Buyback size as % of public shares | Acceptance Ratio % | Total Return % |
| 1 | Gail India | 10.3 | 1.55 | 3.25 | 67 | 6.41 |
| 2 | NALCO | 17.3 | 6.98 | 14.40 | 100 | 17.30 |
| 3 | NIIT | 20.0 | 6.96 | 10.60 | 20 | -8.00 |
| 4 | SIS Limited | 35.8 | 1.23 | 4.62 | 12.9 | 7.55 |
| 5 | Quickheal Technologies | 26.3 | 9.85 | 36.26 | 71.82 | 30.00 |
| 6 | Welspun India | 24.4 | 1.66 | 5.53 | 18.18 | 29.38 |
| 7 | Star Cement | 40.2 | 2.00 | 5.92 | 2.66 | -3.32 |
| 8 | eClerx Services | 22.8 | 3.05 | 6.92 | 13.55 | 5.96 |
Note: This is how the return in calculated. The average market price in the two days after the public announcement of the buyback offer is used to calculate the cost of purchase. The average market price of the two days after the completion of the entire process is used to calculate the sale value of the unaccepted shares.
A typical share buyback (tender offer) takes around 2 – 3 months to complete and based on that we consider a return below 15% as poor, a return between 15 – 30% as average, and a return of 30% or above as good.
In the list, one company had given good return, two had given average returns, and five had given poor returns. What determined these returns? Knowing those determinants of return can help us make better investment decisions later.
The buyback of ‘Star Cement’ had the biggest offer price premium in the list. If offer price was the determinant of return, then Star Cement should have given the largest return. But it didn’t. The return from the buyback of ‘Star Cement’ was negative.
Note: The offer price premium is calculated using the average market price of the stock in the two days after the public announcement of the buyback.
What about buyback size as a percentage of total shares outstanding? Will having a higher buyback size give good returns. In the list, NALCO, NIIT, and Quickheal technologies had high buyback size relative to their respective shares outstanding. NALCO has given average return, NIIT has given poor return, and Quickheal Technologies has given good returns.
Share buybacks (tender offer) with high acceptance ratio has given good returns. The problem is that we know about the acceptance ratio only after the completion of the buyback, but decision must be taken before the record date for the issue.
Welspun India with low buyback size relative to total shares outstanding has given better returns because its shares appreciated during and after the buyback process. We cannot count on that, because that would be speculating, not investing.
I opinion that 2 things can help in achieving good returns from share buybacks (tender offer route).
The first one is the offer price premium.
A low offer price premium, even though may have high acceptance ratio, will lead only to poor returns. Gail India in the above list is a case in point. A high offer price premium is also not ideal because it will have high subscription leading to low acceptance ratio, and thus low returns. Star Cement in the above list is a case in point. A moderate level of 15 – 35 percent of offer premium would do good.
The second one is the buyback size relative to shares eligible to participate in the offer. Eligible shares include the shares with the public and the portion of the promoter shares that have expressed interest in participating in the offer. The buyback size as a percentage of eligible shares at 10 percent or above would be fine.
The buyback offer of Quick Heal Technologies agreed on both counts and it did deliver good returns.
AMN CAPITAL 
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