Profit from legal insider trading [electronic resource] : invest today on tomorrow's news by Moreland Jonathan

Author:Moreland, Jonathan
Language: eng
Format: epub
Tags: Investments & Securities - General, Investment analysis, Corporation reports, Business & Economics, Business / Economics / Finance, Business/Economics, Investments, Investment & securities, Investing, Insider Trading, Insider trading in securities, BUSINESS & ECONOMICS
Publisher: Chicago : Dearborn
Published: 2000-06-06T16:00:00+00:00

9 / Corporate Buybacks—the Company as an Insider 105

purchase price—and it is taxable under the generally more favorable capital gains rates. So for the shareholder, a cash distribution via a corporate buy back can be very attractive. For the corporation, the corporate buyback—as a means of distributing cash in lieu of increasing dividends—can be equally attractive.

Managers are reluctant to cut regular dividend levels. Because management (not to mention the stock price) is far more sensitive to dividend changes than it is to dividend levels, there is considerable reluctance to increase dividends unless future earnings are expected to be able to support those higher dividends. Although investors tend to expect that current dividend levels will continue, they view corporate buybacks as sporadic events and clearly do not expect that they will be regularly repeated. So corporate buybacks for the purpose of distributing cash to shareholders has appeal for both the company and its owners. When used for this purpose, however, the corporate buyback would appear to have no information that investors can use to help guide their own stock purchases.

Buybacks to Deter Hostile Takeovers

It is no secret that corporate buybacks can be employed by management to fight hostile takeovers. They can be used to affect the hostile takeover attempt outcome in several ways.

Perhaps the most important way that corporate buybacks help to avert the takeover is by making the corporation less attractive to the corporate raider. Corporations with large cash balances are attractive to many raiders. By reducing the size of the corporate cash balance through a stock repurchase, management removes the feature that may have made the target corporation the takeover target in the first place. By a self-tender offer, the corporate target will also remove those shareholders who would be willing to sell their shares at the lower end of the stock price premium spectrum by purchasing those shares itself. The result is an increase in the price that the corporate raider would be required to pay in order to purchase a controlling block of stock in the target company, thereby making the takeover target less attractive.

Share repurchase agreements are also used to avoid hostile takeovers when the target corporation agrees to buy back the shares only from the corporate raider at a substantial premium. This arrangement—often accompanied by a standstill agreement in which the raider agrees not to purchase any of the company's shares during a specified period—is known as greenmail to distinguish it from its more criminal cousin, blackmail. Stock price reactions to a greenmail announcement are typ-

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