The insurance company, Resolution plc, is planning to return up to £500 million to shareholders by way of a share buyback (also called a share repurchase offer).
Companies perform share buybacks when they are cash rich and wish to reduce their cash balance. Buying back shares is a way to reward investors by offering a price exempt from trading fees (or much reduced fees) and also reducing the number of shares in the open market.
Resolution has over £1 billion on its books which comes from its Friends Provident and Axa UK Life assurance businesses. Resolution acquired with Friends Provident in 2007 which also gave it the Axa UK life assurance business.
£3 Billion Rights Issue
Resolution raised a huge amount of cash through a rights issue however early in 2011 it announced that it was going to cease its hunt for new businesses to acquire and focus on developing its current brand and services.
A share buy back is proof that Resolution are serious about consolidating their current stocks and working on developing their products now. They have grown quickly in recent years and now is a good time for them to invest internally and at the same time reduce the number of shares on the market which will reduce risk of hostile takeovers.
Fixed Price or Dutch Auction
There are several ways a company can buy back its own shares. Sometimes it will just fix a price and invite shareholders to tender.
If it wishes to restrict the number of shares / the amount of cash it has to pay it will most likely issues a Dutch Auction and invite shareholders to bid to tender their shares at a price within a fixed range. The company will then start tallying up the number of shares tendered from the lowest price upwards until it reaches the target cash figure.