The stock holders are the owners of the corporation, what happens if a company buys back all it’s stock, who owns the corporation? Who votes for the corporate officers? Could you abandon a small single owner/shareholder corporation by having it buy you out and walk away?
It goes back to being a private company. Hugh Hefner (and some partners) recently bought back the shares of Playboy, which had been publicly traded since 1971.
Concur. A small list of well-known private companies from Wikipedia:
Who owns it then? Does it become a sole proprietor or partnership with the owner being the president of the corporation when the buy back was made?
That means that Hugh Hefner bought out the shares of Playboy. The OP is asking what would happen if Playboy itself bought out the shares of Playboy, which is of course nonsensical, and any board authorizing it would either be in breach of its fiduciary duty or committing fraud or both.
It depends. If it is a corporation, almost by definition, it has stock that is held by multiple parties. The primary distinction, as I understand it, is that shares are not traded outside the group of owners. My mother worked for almost 30 years for a private corporation, and when she left, the biggest problem they had was that she owned so much of their stock, the other owners had trouble coming up with the money to buy her out. That was 10-ish years ago, and I think she’s still getting quarterly checks.
How so? If the board sees the company has large reserves of cash and due to a fluctuating market the stock is currently undervalued isn’t it a smart move to buy back stock? Seems like in the long run it makes the companies position stronger. What am I missing?
If you think about it, “all of the corporation’s stock” essentially equals “the corporation’s entire net worth.” Thus, it could not buy all of its stock without paying out its entire value. In other words, the only way it could buy itself would be by selling itself. It’s a logical impossibility.
As Freddy noted, becoming a private company is something else entirely.
Right, but because stock values can fluctuate irrationally, a company’s stock value can easily exceed it’s net worth by a substantial amount. But the opposite situation would be needed for the OP to work–the corporation’s stock would have to be substantially undervalued. So the corporation could suddenly sell off some of its assets, get a bunch of cash on hand, and start buying up its own stock.
It is increasingly common for corporations to purchase their own shares. This is logical if they think the market value is less than the true value. It is hardly a logical impossibility for a corporation to be able to purchase all its own stock: even if its cash equity is less than its total market value, the corporation might be able to control larger sums through borrowing. The result, if shares outstanding did indeed drop to zero, would be a sort of paradox since the corporation ends with zero owners.
There may be legal restrictions preventing this. The wiki article mentions a “10/12 limit” (though it also seems to mention a mechanism to bypass that limit).
But any such disparity is going to narrow as more stock is bought. That’s the point of repurchasing; it raises the value of the shares held by the remaining owners.
It’s the finishing where the problem arises.
Look, I’m not saying that it’s impossible to draw up a set of sales documents whereby the owner(s) of a corporation purport to sell all of their shares to the corporation. The hitch, though, is that the corporation purportedly buying the shares is, by definition, wholly owned by the people purportedly selling. Any court would presumably treat such a sale as it would an attempt by me to sell my house to myself – as a legally meaningless act.
To use a metaphor to explain why it’s impossible: We all agree that you can cut off your foot and eat it. You could eat your whole leg. Maybe you could eat 75% of yourself if you really tried. However, it would be impossible to eat 100% of yourself.
Also note that in attempting to buy back all your stock on the open market, you are going to find that some shareholders simply do not wish to sell. Period.
As discussed recently, companies will sometimes go private. This is not a “buyback” in the sense we are talking about. A majority of the shareholders, in accordance with the corporate bylaws, approve the deal to go private. Shareholders are bought out, whether they wished to go along with the deal or not. At some date their shares will be cashed out or exchanged. Usually, the company which is going private lines up private investment firms such as Silver Lake to provide the capital to cash out the shares, and those firms become major stakeholders in the private company.
Of course, “majority of shareholders” means that somebody can try to obtain enough shares, and line up other sympathetic shareholders to force the company to do something the board currently doesn’t want, such as sell the company. See Carl Icahn. Currently trying to take over Clorox.
Share buybacks are popular when shares are perceived to be undervalued, and usually amount to a fairly small fraction of the companies outstanding shares. Some shareholders also prefer that the company do buybacks rather than issuing dividends, which will be taxed, whereas the buyback theoretically increases the value of their shares with no tax implications until they sell.
Also my understanding is that the purpose of a company buying its own stock is that with less outstanding shares, the share price goes up. As this continues the share price is going to keep going up until there is one share of stock whose value is the entire company. In order to but that last share they are going to have to sell the company.
Its like going faster than the speed of light. The closer you get the harder it is to get closer.
Freshman Accounting: Assets=Liabilities+Equity
Assuming a company with no liabilities, it would take ALL of a company’s assets to buy all of its stock. A snake eating its tail and continuing.
Yes but value of outstanding shares < > value of assets, except in the theoretical world of a freshman college class.
Kodak’s market cap is roughly $575 million, yet they hold digital imaging patents which are valued at $3 billion.
This makes the company a target for takeover, something Kodak’s board might feel is not in the company’s best interest. They could sell a handful of those patents and buy back a significant percentage of the stock… then resell later when (if) the stock price rises. They could also make the stock buyback to prevent a buyer from coming in, selling all of the patents, and closing up the rest of the business.
Reading through this thread, I think I see the missing piece of data:
When a corporation, acting as the corporation, buys shares of its own stock, those shares then cease to exist and the stock certificates could then be shredded, if desired, as they no longer have any value.
This then increases the value of the remaining outstanding shares because there are now fewer shares among which to divide the total worth of the corporation.
If the corporation managed to buy all the shares except one, then that one share would be worth the total worth of the corporation.
What would happen if the corporation tried to buy that last share? I suspect there are regulations against it but, even if not, if I were the owner, I sure wouldn’t want to sell it.
This is not always true. Sometimes, the shares are held as Treasury stock, eligible to be reissued at a later date without the regulation associated with new share issues.
Yes, but it also decreases the value of the remaining shares because company assets must be used for the repurchase. The net effect on share price is indeterminate.
However, the following real world relationship does exist:
Total Enterprise Value = Market Value of its Debt + Market Value of its Equity
This is essentially the same equation as A=L+E
The point is that a company could never accumulate enough cash to buy back all of its stock, so the OP’s scenario is impossible. I can expand on or demonstrate this, if necessary.
This makes no sense to me. If this is what happens, it makes absolutely no sense to do it, but multiple posters say it is occasionally done.