So you get the share repurchase thing, right? Companies think that Wall Street is nuts to be selling their shares at some stupid low price...call it 12 bucks a share. So the company buys back its own stock. But let's say it thinks that, in a few quarters, its new product will be blammo, and its stock will be rocking again. And even though it disclosed everything to everyone, the stock, still at 12 bucks a share, is a screaming bargain buy.
So the company wants to accelerate things. And in an ASR, what happens is that the company basically advances their broker/bankers a big chunk of cash, from which the bank draws to buy back shares in bulk, with the goal of doing so...quickly. Before word of the new flying car actually working and not killing people (like it did before) gets out.
The bank then goes out into the market and just aggressively buys shares, usually at a modest premium...but then, if it turns out that the shares later sag and the bank is able to unwind some of its derivative positions, essentially making the shares cheaper to have been acquired, it then rebates, or gives to the company additional shares in the buyback. The key idea here: the size of the pie shrinks, and the volume of pie given to each shareholder for the same percentage ownership-sized slice...increases.
Related or Semi-related Video
Finance: What Are Shares Outstanding?268 Views
Finance a la shmoop what are shares outstanding Okay first
things first this is not a qualitative assessment of shares
shares maybe bad awful mediocre good or even outstanding but
that's not what this term refers to it also doesn't
mean that they're you know out standing in the ring
paying dividends in the way that they don't do that
Sorry won't sing again Alright rather shares outstanding is a
technical term that reflects how many pieces make up the
sum total of the ownership pie of a company So
here is what baby's first chainsaw dot com looks like
it has forty million slices and is currently trading for
fifteen bucks a slice while new toddlers were so into
mechanical power tools or how sick and twisted the writers
it's from up Are you been here anyway If you
didn't catch the cleverness here a slice equals a share
so the company has forty million shares outstanding They're trading
at fifteen bucks age and that gives the company a
market value of six hundred million dollars That means that
if someone wanted to buy the entire pie they could
in theory pay six hundred million bucks assuming everyone would
Sell them all their shares for fifteen bucks each and
the shares outstanding Change Sure Bunch of factors change that
number all the time When an employee decides to either
buy out or sell the stock options granted to her
when she joined the company Well those options convert into
shares So if she had ten thousand options and sold
them the company would have then ten thousand fewer options
outstanding We're kind of like a liability but it would
now have forty million ten thousand shares outstanding The options
just converted into shares on men Okay what if the
company wanted to raise thirty million bucks to buy a
small competitors for all cash Well it could sell to
the public two million shares at fifteen bucks a pop
Did it already own those shares Well likely not They
weren't just sitting in the vault in treasury stock so
it had to print those shares out of thin air
to dot and then sell them to new buyers So
add two million to the total and now the company
has forty two million ten thousand shares outstanding It also
has thirty million bucks more in cash on its balance
Sheet by the way now there's a danger in the
increase in shares outstanding It's called share creep and it's
not this guy Rather it refers to the gradual increase
in shares outstanding otherwise known as dilution because now instead
of a six hundred million dollar valuation with forty million
shares at fifteen bucks the company if it were to
still have a six hundred million dollar valuation now it's
more shares outstanding would see its stock price drop teo
six hundred million divided by forty two million ten thousand
and yeah that gets you fourteen dollars in twenty eight
cents a share So in the process of the options
being converted and the cash being raised by selling equity
the company destroyed seventy two cents a share in value
Now in real life the market probably goes up and
makes account for all that What were omitting here is
that the company raised thirty million bucks of cash in
the process Cash that well we investors presume it will
use wisely and not on you know kibble for the 00:03:14.07 --> [endTime] office terrier
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