Share Buyback: Tender Offer vs Open Market Explained

How Does a "Buyback" Work?

Suppose a company has 10 crore outstanding shares and reports an annual profit of ₹1,000 crore. Its Earnings Per Share or EPS comes to ₹100. 

Now imagine the company buys back 1 crore shares. The outstanding share count falls to 9 crore shares. Profit remains unchanged, but EPS rises to around ₹111. 

This is one reason why buyback announcements often attract attention in the market. 

Buying back shares while being bearish on its current operations also helps boost the proportion of allocation of earnings per share. This tactic assists in raising the price of the stock while maintaining the same price-to-earnings (P/E) ratio. As the earnings per share increases, the company’s P/ E ratio decreases, i.e., the price of the stock increases. 

Companies often reward their employees with stock rewards and stock options. They also buy back shares for compensation. To offer rewards and stock options, companies issue repurchased shares to their management and employees. This also helps to prevent diluting shares of existing shareholders. It is also a known way for companies to ensure no one stakeholder ends up acquiring a controlling stake in the company. 

There’s also the flexibility angle. Dividends feel more like a commitment. Once a company starts paying them, people expect them regularly. Buybacks aren’t like that. They can be done once, skipped, done later, whenever the company feels it’s the right time. So for management, buybacks give more freedom. 

Methods of Buyback

Broadly, a company can buy back shares through the following methods: 

1. Tender Offer 

2. Stock Exchange Purchase (Open Market Buyback) 

3. Book Building Process  

However, the book building route is used only by listed companies and is far less common in practice. Because of this, investors usually come across two major methods more frequently: the tender offer route and the open market route. 

Although both methods serve the same purpose of reducing outstanding shares, the way they operate is quite different. 

What is a Tender Offer Buyback?

A tender offer is the more direct route. In this method, the company announces that it wants to buy back a fixed number of shares at a specific price. Usually, this price is higher than the current market value. 

For instance, if a stock is trading near ₹400, the company may announce a buyback price of ₹480. The higher price acts as an incentive for shareholders to participate. 

Investors who want to take part have to submit or “tender” their shares through their broker during the buyback window. 

However, there is one important point many first-time investors miss. The company may not accept all the shares tendered. 

Suppose ABC Limited announces a ₹1,000 crore buyback through the tender route. The buyback price is fixed at ₹500 per share, while the market price is ₹420. 

Naturally, many shareholders may want to participate because of the gap between the two prices. 

But if applications are too high, the company accepts shares only in a certain ratio. So, an investor offering 100 shares may ultimately see only 30 or 40 shares accepted. 

This acceptance ratio becomes extremely important in tender offer buybacks. 

Still, this method remains popular among retail investors because it usually offers a premium over the market price.

What is an Open Market Buyback?

The open market route works differently. 

Here, the company does not directly approach shareholders with a fixed offer price. Instead, it starts purchasing shares gradually from the stock exchange, just like any normal investor would. 

The board usually announces a maximum buyback size and a ceiling price. However, the actual purchase price keeps changing depending on market conditions. 

For example, a company may announce that it plans to buy shares worth ₹2,000 crore at prices up to ₹800 per share. But during execution, it may end up buying most shares between ₹720 and ₹760. 

This route gives more flexibility to the company. 

If the stock price rises sharply, the company can slow down purchases. If markets fall, it may buy more shares at lower prices. Unlike the tender offer route, shareholders do not need to submit shares separately here. Anyone selling shares on the exchange during the buyback period may indirectly sell to the company. 

Open market buybacks also tend to continue for several months. Because of this steady buying activity, the share price sometimes gets support during weak market phases. 

Which Method is Better?

There is no fixed answer here. 

A tender offer usually benefits investors looking for immediate gains because the buyback price is generally higher than the market price. 

Open market buybacks, on the other hand, may support the stock gradually over a longer period. 

Companies also choose methods based on their own priorities. If management wants faster execution and a stronger signal to the market, the tender route is often preferred. If they want flexibility, open market purchases make more sense.

Why Investors Track Buybacks Closely?

Buybacks are often viewed positively because they indicate that the company has surplus cash. In many cases, management may also believe the stock is undervalued. 

Well-known investor Peter Lynch once said: 

“Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.” 

Disadvantages of Share Buyback

There are downsides for buybacks. Sometimes a buyback looks like a shortcut, a way to make numbers look prettier without improving real business performance. And then there’s the debt issue. A few companies borrow money just to buy back their own shares. It may boost things for a while, but long-term it can backfire. This is one of the biggest disadvantages of buyback of shares, and analysts bring it up all the time. 

Another point people forget is opportunity cost. If a company uses a huge chunk of money for a buyback, it can’t use that same money for research, expansion, new product development, or clearing old debts. That’s where the “should they have used the money better?” debate comes in. 

Conclusion

At the end of the day, a share buyback isn’t automatically good or bad. Its impact depends on why the company is doing it, its financial health, and how the move fits into long-term business goals. Instead of reacting to headlines, investors should look at the intent behind the buyback and the company’s overall fundamentals. This understanding makes it easier to evaluate such decisions and see how they play out in the share market.