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

BENEFITS OF SHARE BUYBACK -

• The stock is undervalued and a good buy at the current market price. Billionaire investor Warren Buffett utilizes stock buybacks when he feels that shares of his own company, Berkshire Hathaway Inc. (BRK.A), are trading at too low a level. However, the annual report emphasizes that "Berkshire's directors will only authorize repurchases at a price they believe to be well below intrinsic value."
• A buyback will create a level of support for the stock, especially during a recessionary period or during a market correction.
• A buyback will increase share prices. Stocks trade in part based upon supply and demand and a reduction in the number of outstanding shares often precipitates a price increase. Therefore, a company can bring about an increase in its stock value by creating a supply shock via a share repurchase.

advise with reasonings if SoftBank should suspend their share buyback plan ?

The key reasons buybacks can be suspeneded:

• The impact on earnings per share can give an artificial lift to the stock and mask financial problems that would be revealed by a closer look at the company’s ratios.
• soft bank can use buybacks as a way to allow executives to take advantage of stock option programs while not diluting EPS.
• Buybacks can create a short-term bump in the stock price that some say allows insiders to profit while suckering other investors. This price increase may look good at first, but the positive effect is usually ephemeral, with equilibrium regaining when the market realizes that the company has done nothing to increase its actual value . Those who buy in after the bump can then lose money.