Share buybacks of major IT companies have rarely caused stock price euphoria

In 11 of the last 14 cases of IT takeovers, stock prices fared better one month before the takeover than one month after the takeover was announced. Illustration: Chaitanya Dinesh Surpur

DAlthough share buybacks are seen as increasing management confidence in a company’s underlying fundamentals, data analysis shows they have done little to boost share prices. after takeover in most Indian software services companies. On Thursday, Infosys announced a buyout of Rs 9,300 crore to repurchase 1.19% of the outstanding shares via the open market at a price not exceeding Rs 1,850 per share, a premium of almost 30% over the closing price of the day.

However, there is no clear relationship between price gains and takeover announcements in Tier 1 IT companies, according to analysis by ICICI Securities. The data is based on the analysis of the evolution of share prices before and after the announcement of the takeovers. In India, corporate buyouts are mostly led by IT firms due to high cash reserves on their books, but these have not translated into a long-term spike in stock prices.

In 11 of the last 14 cases of IT takeovers, stock prices fared better one month before the takeover than one month after the takeover was announced. IT majors like Tata Consultancy Services (TCS), Infosys and Wipro have regularly announced takeovers at 1.2 to 2 year intervals.

Meanwhile, analysts believe the current takeover could support Infosys’ share price in the near term. “The Infosys takeover should support its share price in the near term,” Jefferies analysts said. However, according to Nirmal Bang Equities, due to the Infosys takeover, its other income components will decline in FY24 and beyond, partially offset by lower shares outstanding.

In 2017, Infosys announced takeovers of Rs 13,000 crore. Similarly in 2019 and 2021, it carried out share buybacks worth Rs 8,260 crore and Rs 9,200 crore respectively. The announced redemption price was 20 to 25% higher than the then prevailing market price. In 2017, Infosys’ share price fell 0.9% one month before the takeover and 6.9% respectively after one month of the takeover. Similarly, in 2019 and 2021, Infosys’ share price fell 1.9% and rose 1.7% respectively a month before the buybacks. While in 2019, one month after the takeover, Infosys’ share price gained 14.6%, in 2021 it fell 5.8% one month after the takeover.

This was not the case for TCS. TCS announced its last takeover in January this year and will not be eligible for another until 2023 under the criterion of a minimum gap of one year between successive takeovers. A month before its share buyback, TCS’ share prices rose 6.9% and 17.6% in 2022 and 2020 respectively. Stock prices have reversed, falling 4.3% and 1% in 2022 and 2020 respectively.

Also read: IT services second quarter results provide mixed signals, reflecting strong demand but also buyer caution

Wipro’s most recent buyout was in October 2020. Wipro’s share price climbed 28.2% a month before the buyout, but fell sharply by 8.1% the following month.

Share buybacks of major IT companies have rarely caused stock price euphoriaThe other two IT majors, HCL Tech and Tech Mahindra, made takeovers less frequently. HCL Tech’s last takeover was in 2018, when the stock rose 3.5% and remained flat a month later. For Tech Mahindra, the last takeover was in 2019 – its stock jumped 13.3% the previous month, but fell 1.4% the following month.

Analysts say frequent buybacks come at the expense of corporate investments and investor euphoria around the stock fades once the buyback occurs. “A buyback signals a shortage of attractive investment or expansion opportunities, which in turn indicate weaker long-term growth prospects. Share buybacks also reduce cash reserves or debt capacity , potentially affecting the company’s credit rating,” said a brokerage analyst who did not wish to be named.

In a buyout, a company buys its shares from its existing shareholders, usually at a price close to or above the prevailing market price.

Buybacks generally improve long-term earnings per share and shareholder value, help investors exit when stocks are undervalued or thinly traded, help achieve an optimal capital structure, and help return excess cash to shareholders. In the short term, the price of outstanding shares can be increased by simply reducing the number of shares on the market.

An increase in takeovers in India is accompanied by a global phenomenon with companies like Apple, Alphabet and Microsoft announcing takeovers. In April, Apple announced a $90 million stock buyback plan. Since 2012, Apple has been buying back its own stock at an extraordinary rate – Apple has been known to spend more on stock buybacks than similar tech giants like Meta or Alphabet. Apple’s total share buybacks totaled $274.5 billion, including $20.4 billion in the December quarter, according to Bloomberg.

Similarly, Google’s parent company Alphabet announced a $70 billion share buyback plan, a sharp increase from $50 billion in 2021 and $25 billion in 2019.

Another reason for the increase in redemptions is that the taxation of dividend distributions (DDT) is in the hands of shareholders, who are liable to pay tax on dividends received at the applicable tax rate relative to a rate lower tax (capital gains) in the event of redemptions. .

Check out our festive offers of up to Rs.1000/- off website prices on subscriptions + Gift Card worth Rs 500/- from Click here to find out more.

Eleanor C. William