An Analysis of Stock Repurchases through Tender Offers-Selected Indian Companies

Share repurchases are done in order to utilize the free cash reserves of the company. The company may have two options, one is to pay dividends and another is to retain its earnings for future growth. But sometimes, instead of giving out dividends which attract lot of tax, the company decides to go in for a share repurchase. So basically share repurchase is a way to distribute dividends to shareholders. The other prominent reason for a company to announce a share repurchase is undervaluation. The company management feels that the market is undervaluing the company and as a resort to correct this valuation, shares are repurchased at a premium to market price and in most cases, subsequently cancelled out.

There are several methods of share repurchase. One of the methods of share repurchase is through tender offers. This study tries to understand the impact of the announcement of repurchase offer through tender offer and its impact on the share price of the tendering company.

In this study, it was found that there were abnormal negative returns for the shareholders after the closure of repurchase. It was also found that there were no abnormal returns to the shareholders pre and post announcement of the repurchase programme.

In comparing the differences in the returns of the three time periods (namely before announcement, after announcement and post closure of announcement), repeated measures ANOVA was used and it was found that there was no significant difference between the returns to shareholders in the three periods. The returns to the shareholders was affected by the number of shares repurchased by the company but not so much by the amount of money spent by the company in repurchasing the shares. It was also found that the returns to shareholders for tender offer companies are significantly different from the returns to shareholders of companies opting for an open market repurchase.