Question

“SoftBank Plans $4.8 Billion Share Buyback Following Pressure From Elliott; The proposed share buyback isn't as large as the one urged by the activist shareholder
Wall Street Journal; New York, N.Y. [New York, N.Y] 13 Mar 2020.
TOKYO—SoftBank Group Corp. said it would spend as much as ¥500 billion ($4.8 billion) to buy back up to 7% of its own shares, following plunging stock prices and a pressure campaign from one of the world's most aggressive activists.”
“Stock-Buyback Plans Shrink; The new coronavirus may threaten companies' buyback plans—though a down market could also create a buying opportunity
Wall Street Journal (Online); New York, N.Y. 09 Mar 2020.
U.S. corporations are signalling a reduced appetite for stock buybacks this year, undermining a pillar of support for stocks at a time of heightened volatility.
Companies authorized around $122 billion in future buybacks through February, according to data compiled by equity research firm Birinyi Associates, marking a nearly 50% drop from the same period a year ago and representing the slowest pace in three years…”
Required:
Discuss the benefits of share buybacks. While having lots of firms suspend buybacks under current market conditions, advise with reasonings if SoftBank should suspend their share buyback plan?

Answer 1

The benefits of share buybacks start with the benefit of correcting the temporary undervaluation that the stock is facing in the market. Secondly it helps the company to reduce its cost of capital. This happens as the equity financing costs goes down after buyback is concluded as unneeded equity is no longer carried on books. Another benefit of share buyback is that the company is able to consolidate its ownership. Important financial metrics like EPS (earnings per share), ROE (return on equity) etc. will also get improved after the buyback.

No, SoftBank should not suspend their share buyback plan. Instead they should go ahead with it and execute it in a careful manner. The company should not buckle completely under pressure from Elliott and should determine the optimal buyback size that will help the cause of its business and its share prices. Softbank’s share prices had plummeted recently due to set backs in its Vision Fund which is the biggest investment fund in the technology industry. SoftBank should go about its buyback in a calculated manner and reduce its spending on further technology related investments.