When WEB does buybacks....

Does Berkshire retire the shares that it buys back or do they just hold them and calculate them and add them to cash?

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Company acquired shares usually become treasury shares. Not outstanding but available for bonuses or reissue when authorized.

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If they are in the treasury, then they are retired? When things like EPS are calculated, then the treasury shares are used in the math or not?

If they are in the treasury, then they are retired? When things like EPS are calculated, then the treasury shares are used in the math or not?

I don’t think Berkshire’s treasury shares are “retired”; they could theoretically be reissued, sold on the open market, granted as stock-based compensation, etc. Berkshire keeps track of the number of issued, treasury, and outstanding shares (see page K-104 of the 2021 annual report), which would seem unnecessary if the treasury shares were retired.

Nevertheless, the treasury shares do not have voting rights, and they are not used in the math to calculate EPS. (Nor would they receive dividends if Berkshire issued dividends.)

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Thank you both very much for helping me understand what happens to shares that have been bought back by a company.

:^)

If bought back shares were retired, would there be any advantage to other shareholders vs bought back shares being held in treasury?

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The only real difference is ‘treasury’ shares can be used for stock options, RSU’s, or in M&A. On the other hand when shares are retired corresponding number of shares are reduced from authorized shares. No real difference from economic point of view.

If bought back shares were retired, would there be any advantage to other shareholders vs bought back shares being held in treasury?

In my view, this depends on how much you trust management, their intentions with buybacks, and their capital allocation skills.

At many companies, some portion of repurchased shares are granted to employees as stock-based compensation. For some companies (especially in tech), this may be a practical necessity to be able to hire and retain top talent in a competitive environment, without diluting existing shareholders too much. On the other hand, buybacks can be used in arguably more sinister ways to award massive and undeserved payouts to CEOs and other employees, where the repurchases merely prevent the total number of outstanding shares from ballooning out of control.

Repurchased shares can also be reissued, for example, to pursue stock-based acquisitions of other companies. Again, this can be a wise move or a capital-destructive move, depending on the value of what’s being given up and the value of what’s being received.

If repurchased shares were retired (instead of being kept as treasury shares), it would constrain management’s ability to do things with the shares. That could be good (or not) depending on how much management can be trusted to do what’s in the best interests of the shareholders and for the long-term prospects of the company (as opposed to, for example, what’s in the best interests of themselves).

With Berkshire, I don’t worry too much about these things. Berkshire does not grant stock-based compensation. And it generally does not use stock for acquisitions, with a few exceptions that, for the most part, have been well-timed (e.g., using Berkshire stock when it was significantly overvalued to acquire other undervalued companies).

As Berkshire has engaged in large repurchases in recent years, there has been a 1:1 correspondence between the number of shares repurchased and the reduction in total shares outstanding (and the increase in treasury shares). This has meaningfully increased each shareholder’s ownership of Berkshire’s businesses. As Buffett explained in the 2021 annual report: “During the past two years, we therefore repurchased 9% of the shares that were outstanding at yearend 2019 for a total cost of $51.7 billion. That expenditure left our continuing shareholders owning about 10% more of all Berkshire businesses, whether these are wholly-owned (such as BNSF and GEICO) or partly-owned (such as Coca-Cola and Moody’s).” That’s true despite the fact that the repurchased shares are still on the books as treasury shares.

But you can imagine a scenario where things would be different. Say, hypothetically, that Berkshire had granted these repurchased shares to Buffett to the tune of $51.7 billion in stock-based compensation. That would be a huge net negative for existing shareholders ($51.7 billion in cash going out the door with no corresponding increase in ownership), while massively rewarding one of the already wealthiest people on the planet. If that were the case, I would much prefer the repurchased shares to be retired to prevent the company from engaging in things like that. In reality, Buffett gets paid a relatively paltry $100K (plus benefits like security and use of the corporate plane). So I don’t worry about the repurchased shares being held in treasury at Berkshire. But at some other companies, I would be more concerned. Of course, I probably would not be a shareholder of those companies either.

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