Corporate Finance soundbite: Mergerspresso

Simon:

The return of returns. Welcome back to Mergerspresso I'm Simon Wood and together with Jeremy Cruse we're taking a look at the strategies behind share buybacks. A shot of insight without any froth. Jeremy, what are you having?

Jeremy:

I thought you were trying to give up caffeine, But back on point, returning capital to shareholders, it's really quietly become a key strategic decision in boardrooms. And that's mainly being done via share buybacks.

Simon:

And as an M&A lawyer, I do find that slightly dispiriting. You'd hope companies could find something more interesting, growth-oriented to do with all that spare cash. For years, buybacks are were seen as little more than corporate housekeeping, but they do now seem to be a key strategic plank of most results announced.

Jeremy:

Yes, I agree. And I think it may be symptomatic of what might be a broken relationship between some companies and their shareholders. Shareholders, they want to see investment and growth, but they will also hold the board accountable for that. And if growth isn't on the table, whether that's organic or through M&A, there's a real expectation that any surplus cash goes back to shareholders.

Simon:

And that surplus, in theory at least, should shore up the persistent low share prices that both companies and shareholders have been complaining about as valuations become disconnected from reality. Now buybacks shows you believe your stock isn't devalued and it's a defence tool of sorts to nudge up a share price and deter one of the many opportunistic bidders out there.

Jeremy:

Yes, absolutely. But it's not just bidders, of course. It may also help get in front of any possible campaigns from activist shareholders. A disciplined and proportionate buyback can very much ward off shareholder discontent. You mentioned share prices there, which, of course, have been generally on the rise recently, albeit from a low base and leaving aside obvious recent events. So timing is key here.

A question boards might need to consider is do you really want to be using capital to buy back when the valuation curve is generally upwards?

Simon:

Cash is cash though, and I mean, you can't control what your share price is doing. And a buyback does add liquidity to your stock, which is what the Exchange is generally crying out for.

Jeremy:

True, true, but we also need to zoom out a bit, I think. Any buyback really needs to sort of complement a well-planned capex, carefully manage leverage and of course dividends. The market should understand not only the buyback, but the broader capital strategy. And ultimately, when buybacks are done well, they strengthen the company and send a strong signal to investors.

Simon:

Thank you, Jeremy. Well, that's all for today. We'll catch you next time on Mergerspresso And in the meantime, please do click the link and give us a review on Apple, Spotify or Amazon.