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-

A. It will help in increasing the controlling ownership of the stock for the company.

B. Buyback of shares will also mean that the company will be buying back the shares at the premium and it would be leading to increase in the market price of the company and increase in the overall market capitalisation

C. share buyback will also mean that there will be a transfer of wealth from the company to the shareholders and it is better than dividend because dividend is not taxed once and it is taxed twice

Lot of companies are suspending their share buyback under current market conditions because share buyback will involve a large amount of outflow of The Reserve and the cash so the company will be having a lower amount of the liquidity in the hands at the times of the pendemic, when there will be up reduced prediction of revenues in the future, so these companies will be having a higher risk related to their survival in the long run and the company should be trying to have optimum amount of cash in their hands so that they can survive and hence there is a reduced tendency of share buyback at the current time.

Softbank should also postpone share buyback or it should reduce the overall share which is to be bought back because it will be providing liquidaty for the company at the time of the crisis and it will also provide flexibility at the time of this crisis to survive and sustain for the longer period of time and capitalise upon the opportunity when other firms are closing down.