The stock buyback consists in a financial transaction through which a public company repurchases its own shares previously placed on the market, through the use of its own cash. Stock buyback operations, historically widespread especially on Wall Street, have also recently reached the Italian market. In particular, in the last year and a half, four of Italy's largest banks have resorted or have decided to resort to such an instrument, triggering a sort of “stock buyback race” among the large companies listed on the Milan Stock Exchange.
The buyback may be defined as an investment operation that responds to a precise rationale, different from other so-called “internal dealing” operations, such as the purchase of company stocks by management through the use of personal resources. In fact, the main goal of a buyback transaction is to reduce the number of company's stocks available on the stock exchange, increasing their price and setting them aside as an investment.
A public company which aims to conclude a buyback operation, shall (i) comply with the quantitative limits set by Article 2357 of the Italian Civil Code for the purchase of treasury stocks, (ii) obtain the necessary authorization by the extraordinary shareholders' meeting, (iii) be expressly authorized by the European Central Bank.
Anyway, among the main purposes that may lead the extraordinary shareholders' meeting to authorize a buyback transaction, first of all there is the goal of increasing the earning per share (EPS). This will increase the price of each stock and, potentially, the total amount of distributable dividends to shareholders. This operation, in particular, is useful to (i) support the stock price on the Stock Exchange, especially if it is undervalued, (ii) increase the confidence of the financial markets in the company, (iii) recover stocks that can be used by the company as stock options for the remuneration of managers and employees, (iv) invest excess profits, if no other alternative investment is deemed sufficiently safe at the same conditions, (v) set aside a reserve of stocks in order to sell or exchange them in the future within a potential acquisition.
However, resorting to buyback also has its downsides. For instance, let’s take into account the fact that, by buying back its own shares, the company deprives itself of cash that could be alternatively used in productive investments to expand its business, in research and development, in M&A operations (...). Furthermore, buyback operations are very often financed by resorting to debt, in terms of taking advantage from possible low rates. This debt, however, could place a heavy burden on the company's accounts in case of rates rise, or if the company itself will face any economic crisis.