Accelerated Share Buyback

Buying back shares outstanding has been a pretty straight-forward accounting topic, but here is a new twist that will add to a lecture. Obviously the benefit of a stock buyback is that it reduces the number of shares outstanding (or keeps the shares outstanding constant given all of the employee stock options that are being issued). However, one problem that has occurred is that buybacks take a good bit of time and thus any boost to your EPS is not directly shown.

Accelerated Share Buyback programs are a new way of buying back a large chuck of stock all at one point in time. Here is how it works:

Company X talks to its investment bank and says that it wants to repurchase 10% of its outstanding shares. The investment bank "borrows" 10% of the outstanding shares immediatly and sells them to Comp. X. (The investment bank has shorted the stock)

This would seem dangerous for the investment bank since lower shares outstanding may lead to higher EPS which would boost the stock and make it more expensive to buy back. However, in most of these agreements the investment bank price protects itself from higher future prices by making company X reimburse it for any additional costs of buying back the stock.

This is the issue: this means that the true cost of the buyback program is not known until much later while the company is showing higher EPS right away.