I confess that I understand very little of this. Can someone explain what does this mean in layman terms?
I did understand that Apple is going to invest more money in its own shares, as a result of which, the portion of Apple, Inc. owned by other investors will be reduced. However -- what does this imply? Is this a general pattern that companies follow at some point in their lifetime?
Again, I apologize for my lack of knowledge in this domain.
What this means is that each share owned by the public will represent a (somewhat) larger share of Apple. If Apple buys back about 15% of the company (about what the $60B plan they announced represents at curren price) then what was previously 85% ownership of the company will now be 100%: about a 17.6% increase.
I don't think you have it right. The buy-back doesn't make each share owned by the public worth more of Apple. What it does is makes the company own more of its own shares (i.e. more shares are owned privately instead of publicly). The easy way to understand it is to take it to the extreme. If Apple bought every share but one, that one shareholder would not own 100% of the company. If Apple bought every share that would be taking the company private.
When a company is taken private, what happens is that one group of shareholders buys all the rest of the shares, and removes the company's shares from public trading. This is what Michael Dell and his group are currently trying to do.
I doubt a company could take itself private. Who would own it? Would it own itself?
MaysonL's explanation in the grandfather comment to this one is right. You do have to take into account that the 85% that will now be the new 100% will have less capital on hand, though.
If the stock market price is efficient, the new apple should only have a market cap of 85% of the old one. If it's more (or less), the stockmarket is not really rational..
You're all talking past each other. "Taking a company private" has nothing to do with stock buybacks. Stock buybacks are when the company itself buys its own stock and then cancels the shares, which increases the percentage ownership stake of the remaining stockholders. Taking a company private means that a single large investor (or a cooperating group thereof) buys 100% of the shares and then votes to delist the company from the stock exchange and stop trading the shares publicly.
Dell is currently also in the process of taking itself private in what could be the largest of it's kind, and a precursor to what we could see coming ahead. Read this article for more about it: http://venturebeat.com/2013/02/05/dell-privatization-marks-a...
Different thing: "The first is the buying of all outstanding shares of a publicly traded company by a single entity, taking the company private." That single entity can't be the company itself.
You seem to have understood this for the most part. What this really boils down to is simple economics: supply and demand. Apple says they will spend $100 Billion to buy back shares. But who's shares will they buy, yours, mine? How to decide? How does this help shareholders?
Well... as it turns out, people who know about this news will realize that there is an increased demand for Apple Stock (since Apple effectively entered the market to buy their own shares). These people will hold out to sell at a higher price. More buyers means greater value for the product -the stock in this case. Others will follow slowly causing the price to gradually rise, the stock rose ~4.6% after the news broke.
People who want to sell will take the money and sell (at the higher price), while others will hold on, and will be rewarded by a higher share price of their existing Apple shares. Thus, everyone wins!
In theory, companies return money to their stockholders when they don't believe they can profitably invest the money internally. Large mature energy companies are a common example. Stock repurchasing is a way to hand out dividends while avoiding taxes.
For Apple, the problem is they made entirely too much money over the last decade. Apple currently has 140 Billion dollars in cash and a market capitalization of 380 billion (including the cash, so estimated value of Apple minus the cash hoard is 240 billion). That's a ridiculous amount of money, and there's no way Apple can effectively invest it, so they are giving it back to the investors so they can invest the money elsewhere.
It's a way of "giving money back to shareholders" because buying their own shares on the open market means that they inflate the stock price on the market by buying the existing sell orders out there.
A buyback doesn't inherently increase the price of the shares. A buyback works like this: Start with a company with an operating business valued at $750M and a pile of cash in the amount of $250M. You own 100 shares out of 1000 (10%). Your shares are worth $1B * (100/1000) == $100M. The company now does a buyback of $50M. They buy 50 shares from other shareholders and cancel them. You now own 100 shares out of 950 of a company with an operating business valued at $750M and a pile of cash in the amount of $200M. Your shares are worth $950M * (100/950) == $100M.
That doesn't mean the share price won't change in practice, but not because of the math, rather because of what investors make of the decision.
I did understand that Apple is going to invest more money in its own shares, as a result of which, the portion of Apple, Inc. owned by other investors will be reduced. However -- what does this imply? Is this a general pattern that companies follow at some point in their lifetime?
Again, I apologize for my lack of knowledge in this domain.