The Hindu Business Line : Share buyback: Tender offers fare better

TUBE Investments offered to buy shares 61.5 lakh shares directly from the investors at Rs 100 per share. It managed to mop up all that it set out to do. In contrast, Deepak Fertilizers, which resolved that it would buy 1.83 crore shares from the market, managed to procure none.

Companies that went in for a buyback of shares under the tender offer route achieved better rate of success than the ones that went through the open market route, during 2003.

Of the total 21 companies that went for buyback, nine managed to complete it in full. Of the remaining, 11 managed to complete less than half the shares that they set out to buy while the 12th could mop up a little less than 80 per cent.

Interestingly, in all these cases the buyback price was at a premium to the market price. Aarti Drugs, for instance, offered Rs 39 as the buyback price - 33 per cent higher than the market price.

Companies that went for buyback during 2003 were predominantly mid-cap and small-cap stocks.

Divergent trends: A close look at the number of stocks that completed the buyback successfully reveals that as many as 7 of the 9 resorted for the tender offer route. Only 2 of 11 stocks that went through the open market, namely Mazda and Finolex Industries, completed the buyback in full.

Why is that most of the companies that chose the `open market' route did not complete the buyback? One of the reasons companies resort to buyback is to signal the investors that the stock, indeed, has a higher value than the prevailing market price. This holds good particularly in a bearish market.

During a bull run, however, a company need not complete its buyback if the stock price soars over the buyback price. Sirpur Paper Mills is a case in point. "By the time we received the approval from the statutory authorities, the stock price has gone beyond the buyback price. Hence, we were unable to complete the buyback," the company sources said.

There were other reasons as well. For instance, Bombay Dyeing manage to acquire only 15 per cent of what it set out to buy. Interestingly, the stock price of the company was below the buyback price during predominant part of the buyback period. The company's buyback opened in August 2002 and closed in August 2003. Only post July 2003, the market price went above the buyback price.

The Company Secretary of Bombay Dyeing, Mr P. Govindan, says, "the Rs 65 buyback price is the maximum price offered and we may not necessarily buyback the shares at that price. Our committee decides the price and the number of shares to be bought back, which are based on the board's decision. We have purchased only 7,18,305 shares of the proposed number.

"Second, the liquidity of the stocks also have an important bearing on the buyback".

The Company Secretary of Blue Star, Mr K.P.T. Kutty, on the other hand, has a different point of view. "Investors are unwilling to part the shares with us. Investors prefer to retain our stocks because we pay good dividends. That is why we are unable to complete the buyback," he said.