10
Share buybacks, institutional
investors, and corporate control
Paul U. Ali
Abstract
Corporations routinely use buybacks to return excess capital to their shareholders,
manage their capital structures, and convey signals to the market about the cor-
poration’s financial performance. These are the publicly disclosed motivations for
the vast majority of buybacks that occur in the Australian market. This chapter
examines how buybacks can be used by Australian corporations to achieve those
aims as well as undisclosed objectives such as consolidating management’s control
of the corporation and creating a deterrent to takeover bids.
10.1 Introduction
Australian corporations, in common with their counterparts in markets such as
the United States, routinely make use of share buybacks to channel excess cap-
ital to their shareholders, reorganize their capital structures by contracting the
corporation’s equity base, or provide a boost to a flagging or stagnant share
price. However, compared to U.S. corporations, the rate at which Australian
corporations have resorted to buybacks can be described as “pedestrian”
(Mitchell and Robinson, 1999), with dividends remaining the dominant means
by which Australian corporations make cash distributions to their shareholders.
Despite the low rate of take-up of buybacks by Australian corporations, buy-
backs in the Australian market, in line with markets displaying far greater buy-
back activity, have evolved beyond their original role.
Foremost among these newer uses of buybacks is their employment as a defen-
sive measure against takeovers (Bagnoli, Gordon, and Lipman, 1989; Hunt,
2004). The boost to a target corporation’s shares provided by a buyback can
make it considerably more expensive to acquire a corporation and erode the fea-
sibility of a hostile takeover bid. Moreover, the removal of potentially hostile or
disloyal shareholders from the corporation’s share register has the effect of reduc-
ing the free float of shares that can potentially be sold into a hostile takeover bid,
and by so doing consolidates control of the corporation by interests supportive of
the incumbent management who have not participated in the buyback.
The role of buybacks in the market for corporate control has received wide-
spread attention following the recent contest for control of Arcelor Steel, the

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