Leveraged buyback definition
/What is a Leveraged Buyback?
In a leveraged buyback, a company uses debt to repurchase its own shares. The result is fewer shares outstanding, and possibly more concentrated ownership of the business.
Example of a Leveraged Buyback
A well-known example of a leveraged buyback is Apple Inc.'s share repurchase program that was initiated in 2013. In this case, Apple used borrowed funds to repurchase its own shares, effectively executing a leveraged buyback.
In 2013, despite having substantial cash reserves, much of Apple’s cash was held overseas. Repatriating this cash would have triggered significant U.S. tax liabilities. To avoid this, Apple decided to issue $17 billion in corporate bonds—the largest corporate bond sale at that time—instead of using its offshore cash reserves. The company took advantage of historically low interest rates to finance the buyback at a low cost.
With the borrowed money, Apple repurchased a large number of its own shares, reducing the number of shares outstanding. This move boosted its earnings per share and returned value to shareholders by increasing the ownership percentage of the remaining shareholders. The buyback was part of a broader capital return program, which eventually expanded to over $90 billion in share repurchases.
By using debt to finance the buyback, Apple leveraged its balance sheet while maintaining its offshore cash reserves, illustrating a strategic use of a leveraged buyback to optimize capital structure and shareholder value.
Advantages of a Leveraged Buyback
There are several advantages to the use of a leveraged buyback, which are as follows:
Increase earnings per share. Employing a leveraged buyback increases the earnings per share of the issuer, since the number of shares in the denominator of this calculation is reduced. Public companies routinely take on debt in order to buy back their shares, on the grounds that investors tend to bid up the price of company shares as a result of the improved earnings per share results.
Reduced value to acquirers. A leveraged buyback makes a firm a less interesting takeover target for a hostile buyer. The buyer would have to assume responsibility for the debt, which would reduce any positive cash flows that might otherwise be expected from the acquisition.
Disadvantages of a Leveraged Buyback
There are several disadvantages to conducting a leveraged buyback, which are as follows:
Higher risk. Engaging in a leveraged buyback increases a firm’s interest expense, its debt load, and its breakeven point, so the outcome is an increased level of risk.
More cost cutting. A business will likely need to engage in cost-cutting in order to pay down the associated debt, which reduces the amount of funding available to pursue new opportunities in the marketplace.
Less investable cash. A leveraged buyback leaves less cash available to make capital investments in the firm, which could harm its long-term prospects.