Accelerated Share Repurchase (ASR)

What Is an Accelerated Share Repurchase (ASR)?

An accelerated share repurchase (ASR) is an investment strategy where a publicly-traded company expeditiously buys back large blocks of its outstanding shares from the market by relying on a go-between investment bank to facilitate the deal. To initiate such a campaign, a company must first furnish upfront cash to the investment bank. It must then enter into a forward contract, which is simply an agreement between two parties to purchase or sell a security at a future date.

The investment bank, in turn, borrows shares of the company, typically from institutional investors such as mutual funds, insurance companies, and pension funds. The investment bank subsequently funnels those shares back to the company in question. Companies typically engage in accelerated share repurchase (ASR) programs when they believe their stock shares are undervalued because this process tends to ultimately inflate the stock's value.

How an Accelerated Share Repurchase (ASR) Works

Consider a successful company that wishes to quickly reduce the number of outstanding shares floating around in the open market. If that company took the traditional route of periodically executing direct share buybacks, the price it would pay per share would vary, depending on the day it bought back shares.

Additionally, share buyback programs can take time to complete. According to the Securities and Exchange Commission (SEC), if the company makes a tender offer to its shareholders to buy back shares, it must keep the offer open for at least 20 business days after it begins.

But if the company instead relied on an accelerated share repurchase program to gobble up a bundle of stocks all at once, by buying those shares from an investment bank intermediary, the company and the bank could dictate the terms in a way that mutually benefits both parties. This method reduces some of the pricing uncertainties for the company while allowing the bank to pocket handsome fees. But the bank faces a degree of risk, in that it can never be sure of the price it will be able to command when re-selling shares back to investors.

Benefits of an Accelerated Share Repurchase (ASR)

To investors, stock buyback events indicate that the company has ample cash on hand, which it's willing to use to reward shareholders. For this reason, accelerated share repurchase programs generally benefit participating investors for several reasons.

First, the completion of this process can radically reduce the outstanding shares in the world, which spikes the earnings per share (EPS) of stock still in circulation. Second, the price of the stock should theoretically begin rising because the stock becomes more attractive to investors, thereby increasing demand.

A stock buyback benefits investors because the reduced number of shares outstanding typically increases share price over time.

Special Considerations

Accelerated share repurchase programs don't just serve to raise a stock price. They also enable companies to swiftly consolidate ownership. Simply put: with each share of stock a company issues, it must likewise extend an ownership stake in the business to the shareholder who made the investment. This effectively lets investors influence a company's financial and business decisions. But by depressing the number of shares outstanding, the company can amplify its control when making key strategic moves.

Example of an Accelerated Share Repurchase (ASR)

On Aug. 19, 2020, Intel Corporation announced it was entering into accelerated share repurchase agreements to repurchase $10 billion of its common stock. International banking group BNP Paribas Securities Corp. acted as the structuring adviser to Intel on the ASR agreements.

According to the terms of the ASR agreements, Intel agreed to initially receive approximately 166 million shares. The total number of shares to be repurchased by the company would be based on the volume-weighted average price (VWAP) of the company's common stock during the term of the agreements. This would be subject to adjustments and a discount. The final settlement would occur by the end of 2020.

According to Intel CEO Bob Swan, a key driver for the share repurchase was the company's belief that the shares were trading well below their intrinsic valuation. Strong operating results in 2020 meant the company could fund the share repurchases with existing cash, allowing the company to return capital to stockholders through the repurchases and through dividends as well.