The CFO's Guide to Structuring Cashless Buybacks(TM) - How Your Company Can Best Buy Back 50% of Its Shares
46 Pages Posted: 21 Sep 2016 Last revised: 29 Sep 2016
Date Written: September 19, 2016
A Cashless Buyback(tm) enables any corporation, large or small, regardless of financial strength, to capitalize in size at low risk on a period of substantial equity undervaluation. A Cashless Buyback(tm) sets before a CFO a proposition in the following general form:
"Your company's stock now trades at $10.00 per share with 100 million share equivalents outstanding ($1.000 billion equity market value). If your firm's stock price can hit $21.50 within 7 years ($2.150 billion equity market value target), then execution of a Cashless Buyback(tm) today will position your firm immediately upon achieving the target either to -
a) Receive a $2.250 billion, tax-free, cash, 'bonus equity' payment with no change in share count (cash sufficient to boost your company's equity market value to $4.400 billion and push its stock price to $44.00, a $22.50 per share benefit) or
b) Retire 51.1% of your firm's currently outstanding share equivalents at zero cost (a share count reduction sufficient to boost your firm's stock price to $44.00, a $22.50 per share benefit).
If your firm misses the target, there is no penalty – no cash outflow, no dilution, no debt burden. The transaction carries no counterparty risk. The sole risk is setup costs, which are modest. Secondary benefits are notable."
Alternative stock buyback methods tie up capital, carry risk, may incur governance conflicts and, in any case, are simply impractical to implement in a size comparable to a Cashless Buyback(tm).
Patent claims on low-risk, high-reward Cashless Buybacks(tm) recently expired. This paper walks through the basic mechanics of a Cashless Buyback(tm) free for all to use.
Keywords: Cashless Buyback, buyback, repurchase, ASR, prepaid forward, call spread purchase, put sale
JEL Classification: G30, G32, G35
Suggested Citation: Suggested Citation