Reacquisition of Shares
The financial accounting term reacquisition of shares refers to a process whereby a corporation buys back shares of its common stock from existing shareholders. When a company reacquires shares of its own stock, a process that is also known as a stock buyback, these securities are classified as treasury stock unless retired by the company’s board of directors.
Companies will issue capital stock to raise funds that can be subsequently used to expand business operations and create additional shareholder value. Companies can choose to subsequently buy back shares from the market and will reacquire stock for a number of reasons, including:
- Increase Earnings per Share: by lowering the number of shares outstanding, a company can increase earnings per share without increasing earnings.
- Meet Stock Option Obligations: oftentimes companies will repurchase shares of their stock to meet their obligations under employee stock compensation programs.
- Establish a Stock’s Floor Price: corporations will sometimes repurchase shares of stock when they believe the price has fallen below a certain valuation threshold, thereby creating a floor price for their stock.
- Contract the Business: in the same way a company may repurchase shares to establish a floor price, a company may also buyback stock when it believes the market price does not reflect the underlying value of the assets owned by the company.
- Prevent Hostile Takeovers: by reducing the total number of shareholders, a company’s board of directors can prevent unfriendly outsiders from taking control of the company.
While it’s fairly common for a company to repurchase some of its outstanding shares of stock, it can also decide to “go private.” For example, in October 2013, Michael Dell and Silver Lake Partners entered into an agreement to repurchase all of Dell Computer’s outstanding shares.
When a company repurchases shares of common stock, they can be retired by the board of directors or held as treasury stock, which allows the company to reissue the shares in the future. Companies that repurchase shares are not acquiring an asset, and they are not entitled to shareholder benefits such as voting rights or dividends.