Daimler's stock rises on announcement of €6 billion share buyback

18 June 2008

When a company's management itself sells off a large proportion of its shares, the price expectedly falls as broader markets see the transaction as a lot of faith in the company's future prospects. The corollary is also true. When a company embarks on a major share buyback programme, the stock rises dramatically, boosting investor returns.

After ending a nine-year loveless marriage with Chrysler, Daimler AG, the world's second-largest luxury car manufacturer and the largest German company by revenue, has announced plans to resume share buybacks after a temporary pause, outlining plans to spend up to €6 billion ($9.31 billion) to repurchase 96.4 million shares or 10 per cent of its stock by 8 April 2009.

Shares bought back by that date, perhaps via derivatives as well, will be cancelled or used for stock option plans, a company statement said on Tuesday.

Under pressure to boost investor returns, Daimler had bought back shares valued at €6.2 billion between August and March. Daimler got approval for a further buyback in April, but didn't act until today, contributing to a 31 per cent drop in the stock this year.

"Daimler's capital structure is to be further optimised with the goal of reducing the use of equity capital, which is more expensive than debt capital. This will avoid investment decisions being limited by excessively high capital costs," the statement said.

Post announcement, Daimler stock rose the most in more than four months in Frankfurt trading, by as much as €2.26, or 5.2 per cent, to €45.94. This valued the company's market capitalization at about €44 billion. Tellingly, the shares had traded at around €78 last October, just after it broke off from Chrysler and renamed itself Daimler from DaimlerChrysler.