A Profitable Way Out Of The Market

Buybacks and open offers give investors a chance to exit the market and also get handsome rewards for being shareholders
The stockmarket gives shareholders opportunities to increase their wealth even during periods when volumes go down, as is the case now. These come from the promoters or prospective promoters, either by way of buyback offers or open offers.
Such activities tend to increase when share prices are down. Presently, there are 83 companies that have either announced opening dates or plans for a buyback. More than 50 companies have announced their opening dates for takeover open offers.
WHAT ARE BUYBACKS?
A company’s offer to purchase its own shares issued earlier is termed as buyback. It usually does not affect the company’s operations or its stability. Its objective is to reduce the company’s share capital as, typically, these shares are extinguished.
Types of buyback. A company buys back its shares by sending a letter of offer to shareholders. It fixes a price, generally higher than the prevailing market price. Companies can also fix a range of prices in which it is willing to buy the shares.
Companies also buy shares in the open market through brokers.
How to evaluate a buyback. In theory, a company goes for a buyback when it has surplus cash and few investment opportunities. In such a situation, companies reward their shareholders by offering them cash for the shares.
However, a developing economy like India, which has many investment opportunities, there are very few companies that can give this reason for a buyback.
Investors should be aware of any manipulation or inaccurate information that a company may give to explain why it opted for a buyback.
A buyback reduces the number of shares in the market and, thus, the earning per share increases. As a result, the price earning multiple (PE) falls and the valuations become attractive, which leads to more demand for the stock pushing prices up.
At times, the management uses this to put a gloss to their financial statements. Investors should note that prices cannot be sustained until the profitability of the company improves.
WHAT ARE OPEN OFFERS?
An open offer is a way in which the acquirer tries to take control of the target company. The acquirer makes a public announcement in the newspapers disclosing his intentions to acquire the shares of the target company.
How to evaluate an open offer? Investors have the discretion to accept or reject the open offer. The offer price can be a major criterion for deciding. If the investors feel the offer is underpriced, they may hold on to their shares. Also, if indications point towards competitive bids by other acquirers, investors can also wait for these bids, which might be more attractive than the present one.
If investors feel that the stock has the potential to perform better than the present open offer, even then they might not put up their shares for sale. Otherwise, at the right price, an open offer is a good exit opportunity, especially in a turbulent market like the present one.
Buybacks and open offers give investors a chance to exit the market and also get a handsome reward for being a shareholder. However, investors should evaluate buybacks and open offers on a case-to-case basis before taking a decision