Loaded with bullion by the dozen, multi-billion companies have constantly made headlines for paying a king’s ransom on the buyback of their shares. Excerpts from history show that $467 billion by Apple, $201 billion by IBM, and $60 billion by Microsoft were spent on one particular thing; buyback. The repurchase of company shares reached nearly $1.15 trillion in the first quarter of 2022. Paytm’s proposal to buy back its shares with an approximate outlay of $127.4 million (Rs 1048 crore) will set this fire ablaze. On the face of it, buyback by a profit-making company is little to no wonder but can be a calamity reaper for a company operating at a loss like in the case of Paytm. Let us dive into greater depths to see why.
The tip-off
Stock buybacks or share repurchases are a part of the corporate action taken by companies to buy back their outstanding shares in the stock market. This helps the company to increase the earnings per share, reduce the number of shares available and improve its balance sheet. The cost of a share must rise in tandem with the rise in the company’s earnings per share. Companies might use the available cash reserves, take debt or issue more stock to fund them back. Shareholders can choose to sell their shares or keep them by accepting the company's offer to acquire them at a premium.
Buybacks are a calculated ripple effect. It spreads all over the map affecting the prices of stocks, market sentiments, and everything everywhere. While it can be an artificial attempt to boost share prices, companies can deploy it as a scheme to mask any underlying financial problems. The buyback process seems straightforward in black and white, but its application may leave one in black and blue as it is quite a behemoth of chaos that demands utmost understanding.
Leap in dark
Buyback has always been associated with assorted emotions. Some buybacks raise major speculations as they could be controversial and potentially harmful while they might also be cordially welcomed as beneficial tools for companies. But occasionally, there is a covert agenda.
In 2012, Reliance Industries executed a brilliant manoeuvre with its share buyback plan to repurchase Rs 3,900 crore of shares from public shareholders. Despite falling short of its goal, the buyback was a resounding success. The company's decision to buy back shares at Rs 870, amidst underperforming shares, spoke volumes about its confidence in the stock's future potential. Shareholders were able to cash in at a premium, while those who believed in the company's vision were richly rewarded.
While in 2011, BHP Billiton was at the peak of its glory, a behemoth in the mining world with booming earnings and a jaw-dropping $12 billion in operating cash flows. The company's move to initiate a massive $10 billion buyback program seemed like a no-brainer but little did they know, the tides were about to overturn. The commodity cycle turned for the worst, causing prices of iron, copper, and coal to crash, and BHP's prospects to plunge. While some lucky shareholders tendered their shares and walked away with cash, those who believed in the company's long-term potential were left to suffer. One year later, BHP's Total Shareholder Return had plummeted to a dismal -22%, leaving shareholders feeling the burn. The buyback proved to be a double-edged sword for BHP and its stakeholders.
Paytm days are numbered?
Paytm has always been on the top 10 list of companies with the worst bottom line. With the company being barred from taking new customers, it is akin to losing with troubles being temporary interruptions in their way of life. Having a consolidated loss of Rs 2,396 crore in revenue, its proposal to spend Rs 850 crore on the buyback of shares at a premium of 52% has raised eyebrows.
The hop on the trend by the loss-making company after Infosys and TCS raised many speculations as they neither have enough money to sustain the buybacks nor to focus on their business growth. The company's intention to repurchase its shares at Rs 810 apiece which is 52% over the stock's existing trading price of Rs 529.90 is a tight grip on the company’s reality.
While Infosys and TCS's buyback program provides its shareholder with relief which is projected through huge amounts of cash, the debt-ridden Paytm’s gesture to gimmick seems impractical. Moreover, its statement to not use the proceeds from its IPO towards the repurchase endeavours makes it a Sisyphean task.
The mismatch
While a buyback could stem the rout in Paytm shares at least temporarily, it puts the company on the other side of the fence. The open market method adopted by the company with the hopes to raise the trading prices of the shares failed to work albeit expectations. Had it opted for the tender route, shareholders can tender their shares for buyback at a fixed price set by the company. Its stance to showcase that the current stock price isn’t a reflection of its value draws further scepticism.
Startups like Nykaa, which offered a 77% yield to shareholders when it went public, saw their stock prices plummet after Paytm`s demise. Moreover, on the listing day when Paytm's stock fell from its IPO price of Rs 2100 to Rs 1500, the stocks of new-age startups like Zomato fell and haven't recovered since. Even founders of unlisted companies like BharatPe commented that Paytm’s missed opportunity has caused the startup market to get into a state from which it may take a decade to recover.
Paytm was the blue whale meant to bring about a significant change in the Indian startup industry. However, its IPO not only failed but also caused the entire startup market to crash. Many investors started blaming Paytm for the falling valuations.
Remnants of the present
Despite the uncertainties regarding Paytm’s buyback, there are suggestions that there might be a glimmer of hope which may bring a positive bull run in the company's share. However, statistics show a bleak future might await the company as the price offered in the buyback is still lower than 65% of its original IPO valuation of Rs 2150.
Paytm buyback is a historic move that will impact the entire industry for years to come. It could lead to the bursting of the startup bubble or the resurgence of IPOs in the market. Shareholders can opt out or wait for the stock to gain momentum from this move. But one thing is clear, this strategy has raised eyebrows and the novelty of Paytm's consistent attempt to use multiple systems to revitalize itself. Will this strategic move by Paytm to rejuvenate in the market add fuel to its dim-lit reputation or will channel the flow of its erosion from the market?
Author: Hardik Jain, Arhaan Aggarwal
Illustration By: Muskan Bansal