Accelerated Share Repurchase: Examples & Program

Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

In this lesson, we'll the look at an example of an accelerated share repurchase (ASR) program. We'll discuss the parties involved, the mechanics of the transaction, and the reasons why a company may embark on such a purchase.

Accelerated Share Repurchase (ASR)

Over the course of a two-month span in the summer of 2015, Mead Johnson Nutrition (MJN) an American-based healthcare company known for Enfamil - a baby formula, experienced a dramatic decline in its market value. From August 7th to September 25th, MJN shares decreased 20%. Shareholders lost approximately $3.4B. The reason for the decline was investors suddenly became nervous about a slight increase in the number of Chinese mothers breastfeeding their babies. More breastfeeding means less Enfamil sales, and less Enfamil sales mean lower profits for MJN shareholders.

This wouldn't have been an issue if China had been a small market for MJN, but the opposite is true. It is one of MJN's most important markets. To support their share price, or to take advantage of what they perceived to be a bargain buying opportunity, MJN's management and Board of Directors authorized an accelerated share repurchase program with Goldman Sachs. They already had a $1.5B share repurchase plan authorized but had not acted on it. Now, they wanted to act fast. They wanted to invest up to $1B in an accelerated share repurchase.

We'll use the example of MJN as we discuss the parties involved in an accelerated share repurchase (ASR). We'll discuss a simple version of its mechanics, and end the discussion by listing some of the reasons why a company may embark on an ASR.

Parties Involved and Mechanics

The parties involved in an ASR include the company, an investment bank, and the investment bank's clients.

In the case of MJN, once their shares decreased substantially and they realized they wanted to repurchase their shares, they had two options:

  1. They could activate their average repurchase program, where they would buy a certain number of shares that traded each day, week, or month.
  2. They could use the accelerated repurchase program by talking with an investment bank and buying a large chunk of shares immediately.

MJN chose the latter approach. Here is a rough depiction of the MJN ASR procedure. MJN first talked to the investment bank (Goldman Sachs) to let them know they wanted to buy a large percent of their shares outstanding to take advantage of the share price's depressed value. The investment bank then set themselves up as the intermediary. They went out and surveyed all their clients who owned MJN. These clients may include wealthy individuals, retail investors in the bank's mutual funds, other companies, or hedge funds. The investment bank wanted to see if they could get enough shareholders that would be willing to lend them their MJN shares for a certain period. Goldman Sachs would then take the borrowed shares and give them to MJN for a certain amount of cash. MJN would then retire the shares, decreasing its shares outstanding.

Once this happened, the investment bank needed to buy back MJN shares on the public market and return those shares to their owners. But, this can be a difficult task because they will likely need to buy the shares at a higher price then they price they borrowed them for.

Once MJN publicly announced their intention to buy back many shares, the share price may increase because:

  1. Each share will represent a higher percentage of the company's earnings.
  2. Investors may see it as a sign that management thinks the shares are currently undervalued.

So, Goldman Sachs may need to pay a high price for the shares. Therefore, MJN gave Goldman Sachs a little bit of extra cash at the time the deal was initiated.

MJN gave Goldman Sachs $1B in cash to receive an initial delivery of 10.7M shares, or the equivalent of 85% of the number of shares of the company that could be purchased at that current market price. The extra 15% x $1B = $150M was compensation for Goldman Sachs to buy back shares on the open market in the preceding months at higher prices. As they bought the shares, they returned them back to their original shareholders.

Reasons for an ASR

There are several reasons a company may decide to accelerate their share repurchase program:

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