Abbott India Limited - Buyback of shares

Company Details: Google Finance, Kotak Research

Abbott India announced a share buyback on 09 October 2006. In brief, Abbott India plans to buyback 25% of paid up equity capital (around 8,00,000 shares) at 650 each for cash. More details are on the link.

We have always been taught share buyback might present a value unlocking oppurtunity and hence the interest. Here is the conversation we had on this company and decision on buyback. As always there are no buy or sell or hold recommendations.

P.S.: Thanks to Arpan, Ashish, Mayank (in alphabetical order)

Mayank wanted to put some money into Abbott India and make some money by buying at CMP (which was much less than 650) and offering the shares for buyback (and make money from the arbitrage).

Arpan came up with following ...

1. Promoters hold 62% and assumption that they would not offer their shares for buyback.
2. Fund flow from the buyback would take two months. Effectively the money would be locked in for two months. The investment is locked in for 107 days from Oct 16.
3. Assumed that MP would be atleast 550 post buyback.
4. Assumed that 35% of remaining 38% people would offer their shares for buyback.
5. If you buy 100 shares, based on above numbers, you can expect 16 shares to be accepted.
6. Annualized returns of 5.76%

Someone added following

1. What is the probability that the company would actually buy the shares back? What happens if they go back on the buy back?
2. Is this just one of the ploys for the company to jack up their stock prices before annoucements of some negative news (bad results etc.) so that the stock price is not badly hit?
3. Finally what is the rationale of having the price as 650? Why not 620 or 670 or 649? Is it, One the rounded figure looks attractive, Two the management might think it is fair value of stock or Three P/E and P/BV and god knows what all ratios are in play?

Arpan replied

1. as to ur point that we have to also consider that the comp might go back on buy back, well the prob is too low to be a concern (better not do a taleb on this )..there are factors that ensure that fallouts of any such action will be drastically negative on teh company...

2. also when announcing the buyback the company has to deposit the 'funds for buyback' in an escrow account with a bank, from which it cannot just withdraw money as and when it wishes...

3. your second point has a major underlying assumption that buybacks are forthrightly a positive sign which might have contrary intentions, but there is another school of thought that does not take buyback as positive at all but...as negative...the logic for the above argument runs like this, company primarily buys back its shares when it is quiet rich with funds (and also when the shares prices are low...), but the company had the alternative of dividends. thus when a company buys back instead of paying dividend, one might have a thought that the company is not sure about the future earnings, ie. its earnigs(funds flush) might be temporary and wants a temporary payout mechanism instead of dividends, which are of a more consistent nature...try reducing the dividend rate and there the price dives southward...

4. as to ur concern that buybacks might be a 'smoke cover' for other negative news, market participants are quiet knowledgeable and have particularly good memories when hit below the belt, thus it is a one time weapon with little upside and huge downside, with all its future announcements being suspicious... thus unless the mgmt is extremely stupide (possible though that is....), this should not happen...

5. as to ur argument that why 650....why not 650??? .... :)

And that was the end of it. Comments? PseudoSocial@gmail.com

03-NOV-2006: Abbott India puts buyback on hold ... ! Source: Yahoo