Buyback methods: open market, ASR, tender offers and Dutch auctions

An authorisation says how much a company may spend. The method says how. Most of the time the method is invisible to shareholders, but it affects the price paid, how fast the share count falls and, occasionally, whether you are being invited to sell.

Open-market repurchases

The default. The company appoints a broker who buys shares on the exchange over weeks or months, blending in with normal trading. In the United States, SEC Rule 10b-18 provides a safe harbour against market-manipulation claims if the company uses a single broker per day, does not trade at the open or in the last minutes of the session, pays no more than the highest independent bid or last trade, and keeps daily volume under 25% of the average daily trading volume. In the EU and UK, the Market Abuse Regulation safe harbour sets similar limits and requires the programme to be announced and reported trade by trade.

Many US companies run their open-market programmes through 10b5-1 plans: pre-set instructions that keep buying during blackout periods when the company has unpublished results. That is why repurchases continue through earnings season.

Accelerated share repurchases

In an ASR the company pays a bank the full amount up front and receives most of the shares immediately. The bank borrows those shares and then buys them back gradually in the open market over several months. At the end the two settle up based on the average price during the period. ASRs let a company retire a large block instantly, which is attractive right after a big asset sale or when management wants the EPS effect in the current quarter. The cost is that the company gives up control over the price and pays the bank a spread.

Tender offers

A fixed-price tender offer invites every shareholder to sell a stated number of shares at a stated premium to the market price. If more shares are tendered than the company wants, it buys from everyone pro rata. Tender offers are fast, transparent and usually mean the company wants to retire a large slice at once, often 5% to 15% of the shares.

The Dutch auction

A Dutch auction tender offer sets a price range instead of a single price. Each holder states the lowest price at which they will sell. The company then finds the lowest price at which it can buy the number of shares it wants, and pays that single price to everyone who tendered at or below it. The name comes from the Dutch flower auctions, where the price starts high and falls until a buyer accepts. It lets the company discover the clearing price rather than guess it, and it tends to be cheaper than a fixed-price offer.

Privately negotiated repurchases

Sometimes a company buys a block directly from a large holder, such as a founder, a government or a strategic investor exiting its stake. These deals are usually priced at a small discount to market and are announced separately. They tell you more about the seller than about management's view of value.

Cancel or keep?

Repurchased shares are either cancelled, which is common in the US and increasingly in Europe, or held as treasury shares for later use in employee plans or acquisitions. Cancellation is cleaner: the share count falls and stays down. Treasury shares can quietly come back.