At Matthews South, we continue to see a meaningful increase in Enhanced Open Market Repurchase (eOMR) interest and usage from our clients. Open Market Repurchase (OMR) users are progressively considering eOMR because of the large expected discount beat that eOMR provides. Additionally, it is an opportune time to use eOMR as they perform best in volatile markets. In this blog post, we answer 5 common questions about the program.
1) What is Enhanced Open Market Repurchase (eOMR)?
eOMR is an open market repurchase program that is designed to maximize the discount to the average stock price during the execution period. The daily buying is determined algorithmically based on parameters specified by the company at the beginning of the program. The daily purchases are currently settled T+2, and will be settled T+1 when the market transitions to the shorter settlement cycle.
In a basic eOMR, the issuer specifies the dollar amount to be spent, time period for the program, and a price limit, if applicable. The program is established in accord with Rule 10b-18 and Rule 10b5-1.
An algorithm determines the daily buying instructions based on the movement of the share price and the volatility of the stock with the goal of maximizing the discount achieved for the issuer while complying with the parameters specified by the issuer.
2) Why Do Issuers Use eOMR?
The VWAP discount is an important benchmark for many repurchase programs. With an eOMR, issuers generally achieve higher VWAP discounts than what they have historically seen in their open market programs (see comparison to dollar cost averaging in the next question below). An eOMR is easy to implement because it is an open market program. The issuer can terminate the program at any time with no penalty and customize it to include features like variable dollar spend and price limits.
Like traditional open market programs, an eOMR can be executed with any broker(s) of the issuer’s choice, including minority and diverse-owned firms.
3) How Does eOMR VWAP Discount Compare to Dollar Cost Averaging (DCA)?
DCA is often considered the base case for open market programs. By spending a fixed amount each day, the issuer is not “taking a view” on share price. It is possible to compare the expected VWAP discount for DCA and eOMR using a Monte Carlo simulation.
Below we compare the expected discount to the average VWAP during the program life for an eOMR (1 to 3 month program) and DCA at various assumed volatilities. The expected eOMR discount is more than 5x that of DCA.
| Expected Discount to Average VWAP | ||
|---|---|---|
|
Volatility |
eOMR |
DCA |
|
30% |
2.4% |
0.4% |
|
35% |
2.8% |
0.5% |
|
40% |
3.3% |
0.6% |
4) Does an eOMR Make Sense in the Current Environment?
The expected discount in an eOMR is proportional to the volatility of the stock during the program period. The high current market volatility implies that eOMRs should generate attractive discounts if the volatility continues. It is important to note that if an issuer has a bearish outlook for the repurchase period, a dollar cost average approach may be a better choice because the price improvement from averaging longer (at the lower future stock prices) may more than offset the lower expected VWAP discount.
5) How Do I Execute an eOMR?
An eOMR requires an algorithm to generate the trading instructions and a broker to execute them. Some brokers provide the algorithm and trade execution as a bundled service. Alternatively, the issuer can source the algorithm from Matthews South and use a separate broker(s) for the trade execution. There are two significant advantages to this approach: first, an approximately 90% reduction in cost because Matthews South does not charge the typical 20% outperformance fee charged by brokers, and second, the issuer can work with multiple brokers, including minority and diverse-owned firms.
To date, issuers have executed over $2.25bn of eOMRs through Matthews South.
Conclusion
For companies looking to generate large discounts and take advantage of the current market, eOMR should be an option that is considered for buyback plans.
Matthews South can help issuers evaluate the benefits and risks of eOMRs and compare it to other alternatives. Please do not hesitate to reach out to the Matthews South team with any questions or requests!
Personal Views: The views expressed in this report reflect our personal views. This blog post is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. The large majority of reports by us are published at irregular intervals as appropriate in our judgment and ability to produce, so updates may not be made or available even when circumstances may have changed.
No Offer: This analysis is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. You must make an independent decision regarding investments or strategies mentioned on this website. Before acting on information on this website, you should consider whether it is suitable for your particular circumstances. You should not construe any of the material contained herein as business, financial, investment, hedging, trading, legal, regulatory, tax, or accounting advice. The price and value of investments referred to in this analysis and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.