The Hidden Gem

Companies do share buy back (SBB) for various reasons.

When a company buys their own shares (usually from the open mkt), the can do the following:

a. Place these shares in a treasury a/c. These shares will not be entitled to dividents. They can then use these shares to reissue them as employees share options. This way, when employees exercise their options, no new shares need to be issued thereby no dilution of major shareholders interest.

b. Cancel the shares thereby reducing the total issued shares in the mkt. They do this for various reasons:

   i. To reduce the number of issued shares in order that the major shareholders can increase their grip on control....case in point Chuan Hup...where the Pehs had their holdings increased to over 50% in a recent spate of SBB (in 2009) and without having to do a general offer.

   ii. To improve their eps.....SBB does not affect the business of the company and hence the profit. Therefore, when the profit is divided by fewer shares after SBB, the eps will be higher.

   iii. Improve the NAV per share. This happens when the buy back price is at a discount to NAV per share. Say NAV is $1.00 and the BB price is $0.50. When they cancel the share, they are cancelling $0.50 of NAV (cost of BB) but issued shares is reduced accordingly.

There may be other reasons Co. do SBB. Usually they do it  when they have excess cash and when the mkt price is at a discount to NAV.

Personally, I prefer mgmt to return excess cash to shareholders in the form of divvy or capital reduction.

Also, the SBB mandate is such that the Co. can only BB up to 10% of issued shares.....so its only in very exceptional circumstances, when there is very little free float, that it is used as a privatisation tool. I personally do not know of any instances like that.