Who Wins In Large Stock Buybacks – Those Who Sell Or Those Who Hold?

Both fixed‐price and dutch auction repurchases offer large premiums over current values to tendering shareholders. And, because announcements of such offers are generally accompanied by significant increases in stock prices, economists view selftender offers as mechanisms for signaling undervaluation. Using samples of fixed‐price and dutch auction self‐tender offers from the 1980s, this study attempts to answer the following questions: Are non‐tendering shareholders fully compensated for the premium wealth transfer by the increase in the intrinsic value of their shares? Since fixed‐price offers feature larger premiums, are they accompanied by larger increases in intrinsic value (or do insiders have a tendency to “overpay” in fixed‐price offers)? Is the premium wealth transfer a big component of the returns to the two shareholder groups—and what percentage of firm value does the transfer represent? The findings of this study, unlike those reported by earlier research, suggest that the two types of offers generate roughly the same total returns (about 10–11%, on average, during the offering period) to shareholders who do not tender. Fixed‐price offers involve considerably larger premiums (over the new, “full‐information” price) and wealth transfers than dutch auctions. Reflecting the higher premiums, shareholders tendering into fixed‐price offers receive higher returns than those tendering into dutch auctions (13.8% vs. 11.3% during the announcement period). But while fixed‐price offers involve a considerably larger wealth transfer from non‐tendering to tendering shareholders, fixed‐price repurchases compensate the non‐tendering shareholders for the larger wealth transfer with larger increases in “intrinsic value,” thus generating the same total return as dutch auctions. Moreover, despite the large premiums offered in both types of offers, the wealth transfer implicit in the premium represents a small cost (less than 1% in fixed‐price offers, and less than 0.1% in dutch auctions) to non‐tendering shareholders.