Repurchase ESOP stock into Treasury

[Guest jeffline]

Unleveraged 100% ESOP company decides it would be in the best interests of all stakeholders to have management accumulate some direct ownership in the organization. They decide to repurchase certain shares directly into treasury for resale to managers. While I am very interested in comments on the fiduciary implications of this, my question goes to stock value.

Specifically, company buys 10% of stock into treasury on Monday. Does that mean that if the ESOP goes to repurchase shares on Tuesday, the per share value is increased because there are fewer shares outstanding?

[Guest Alan Stonewall]

It is true that the value of the shares may have changed because there are less shares outstanding. However, it is not automatically true that the value of a share has inceased. To the extent the company has used cash or incurred debt to retire shares, the value of the company has likely been diminished thereby reducing the per share price of the remaining outstanding shares.

For publically traded companies, it is up to the market to decide whether the share price should go up or down (or stay the same)as a result.

The most prudent approach may be to have the stock price re-valued so that the ESOP trustees have an independent appraisal of the change, if any, to the per share value.