I have outlined the commonly asked question on Share buybacks to facilitate easy reading.
What is Share buyback:
Basically, it is the purchase by a listed company of its own shares.
In what way(s) can we institute a Share buyback scheme:
Can be using the following ways:

• The most common is when a company buys shares on the open market. A company has to get approval from its shareholders during the Annual General Meeting in order to buy back its shares.

• Another one which is less common, is that a company can announce a tender offer. This involves all shareholders submitting a price they would be prepared to accept for their shares. In both instances once the company buy backs the shares it will cancel them, so they will cease to exist. Therefore a company cannot flog the same shares back onto the market at a later date.

Is share buyback something new in the market?
Share buyback has been here for long time. However, it’s popularity catapulted over the past twenty years. In the United States alone, corporate expenditures on share buybacks as a percentage of earnings are ten times higher today than there were in 1980. In the late 1990s, for the first time companies spent more money repurchasing their shares than on paying dividends. Share buybacks are also flourishing globally. In recent years, countries like the U.K. and Canada have seen an increase in activity while other nations that previous prohibited buybacks, including Germany and Japan, have adopted provisions to make them acceptable.
Why do or what are the reasons for companies to buy back their shares?

1. To deploy excess cash flow and return it to shareholders as the management deem that they are unable to utilize these surplus cash to earn higher than the company’s cost of capital. In recent years, it is interesting to note that the fund managers or investment institutions favor companies to return their surplus cash rather than sitting on it just in case they might need it for future acquisitions. The institutions believe that it should be their decision, and not the company’s, to hold part of their assets in cash,

2. To substitute dividend payouts with share repurchases, for tax reason purposes,

3. In time of the depressed market where the share prices of the companies have been unnecessarily thrashed by the public, the management might deem it necessary to do a share buybacks of its shares so as to prop up or increase the share price. By the company’s entry into the market, firstly it create a demand for the share and also it’s add the necessary confidence or psychological impact to the public that the management is confident of the performance of the company

4. To rationalize or to leverage the capital structure - the company believes it can sustain a higher debt-equity ratio,

5. To manage its earnings per share.

Are there any advantages and or disadvantages in a share buyback scheme:
Advantages:

• it might enhance the confidence of its investors on the company’s board of directors,as these investors know that the directors are ever willing to return surplus cash if it’s not able to earn above the company’s alternative investment or cost of capital,

• it enhances shareholders value. Generally, share buybacks are good for shareholders. The laws of supply and demand would suggest that with fewer shares on the market, the share price would tend to rise. Although the company will see a fall in profits because it will no longer receive interest on the cash, this is more than made up for by the reduction in the number of shares.

Disadvantages:

• A buyback announcement can send a negative signal in these situations.

A typical example is the HP case:
From November 1998 through October 2000, the computer giant Hewlett-Packard spent $8.2 billion to buy back 128 million of its shares. The aim was to make opportunistic purchases of HP stock at attractive prices—in other words, at prices they felt undervalued the company. Instead of signaling a good operating prospects to the market, the buyback signal was completely drowned out more powerful contradictory signals about the company’s future which are an aborted acquisition, a protracted business restructuring, slipping financial results, and a decay in the general profitability of key markets. By last January, HP’s shares were trading at around half the average $64 per share paid to repurchase the stock.

• Buybacks can also backfire for a company competing in a high-growth industry because they may be read as an admission that the company has few important new opportunities on which to otherwise spend its money. In such cases, long-term investors will respond to a buyback announcement by selling the company’s shares.

• The share buyback scheme might become a big disadvantage to the company when it pays too much for its own shares. Indeed, it is foolish to buy in an overpriced market. Instead, the company should put the money into assets that can be easily converted back into cash. This way, when the market swung the other way and is trading below its true value, shares of the company can be bought back up at a discount, ensuring current shareholders receive maximum benefit. Strictly, a company should repurchase its shares only when its stock is trading below its expected value and when no better investment opportunities are available.

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