#buybacks

The majority of the company is parsed out into shares, which are owned by people who do not work for the company. This is not the only way that a company can be owned by other people, but it's a common one. So what are shares?

Companies generally start out privately-owned. Whether this is by the found, by a wealthy investor, or by the bank, there is a specific person that you can point at and go "that person owns it." Sometimes, it's multiple people, split up in specific ways (e.g. started by a team of two that each owns 50% of the company by contract), but it's private.

At a certain point, the company may choose to go public. This means that they have assigned a value to the company, split that value up into a set of shares, and declared that those shares are worth a certain percentage of the company. If you own enough shares, you can direct the company's actions.

Let's say a company goes public with a net worth of $1million. They have split that $1mill into 100,000 shares worth $10 each (this one-share value is called the Initial Public Offering, or the IPO).

If a person buys 1,000 shares, they now "own" 1% of the company. With every share a person owns, they can vote once in shareholder elections for how and where the company goes. (This isn't getting into stuff like preferred stock, which is non-voting in exchange for things like higher dividends.)

If they buy 51,000 shares for a total of $510,000, they own 51% of the company, and now have what is called a controlling interest. This means that the person with those 51,000 shares can more or less unilaterally assign people to the board of directors, and so on.

At the initial public offering, a company will not necessarily put up all their stock for sale. When Apple first went public in 1980, they sold 8% of their stock, most of which went into paying off debs. The other 92% stayed with the then-current owners of the company. These days, most of Apple is owned by institutional investors, which means it's owned by other companies that invest on behalf of people.

So, a shareholder-owned company is owned by people who purchased part of the company, and the company used that money to fund its own growth, whether by paying off debts, buying a new factory, hiring more workers, and so on.

TWO: How do companies purchase back their own stock?

...with difficulty.

When a company has grown its wealth enough to purchase its own stock and start re-consolidating ownership, it's called a stock buyback. It happens with some regularity.

After a company has spent the money earned from the initial sales, that's it. They don't earn more money as shares go up in value, none of that actually goes to them, just to whoever is selling.

So there's this thing called 'dividends.' This is where a company pays out a portion of its profits to shareholders quarterly. Walmart currently pays its investors $0.57 per share, per quarter. For someone with 100,000 shares, that's $228,000/year.

(That's not actually that much for someone who owns over $15mill worth of stock, but it's something. It's not where the actual worth of the share is stored, but that's a whole other mess.)

For legal reasons, a company must act in the best interests of the shareholders. So if the shareholders believe that they will be best served by being paid out the profits as dividends, they will ask for those profits in dividends. If they decide they are best served by the purchase of a new factory, then that's what the money gets put towards. If they want to make the corporation bigger by buying a smaller company, then that's what they do.

Stock buybacks are done for a few reasons, like forcing the price per share to go up by creating scarcity (which is good for anyone looking to resell their stock at a profit), or making it so that dividends per share end up higher by lowering the number of shares to divide profits amongst.

Fun fact, one of the big things the covid-19 stimulus package had rules about was stock buybacks because large companies had previously used taxpayer money to bail out their own debts from the act of buybacks, and the government anticipated that stimulus money for covid-19 relief, meant to ensure employees stayed afloat, would be used on stock buybacks and shareholder dividends unless actively banned.

Did you know buybacks were illegal until the Reagan era?

THREE: So... where does that leave us?

Well... basically, the founder, heirs, or workers need to build up all the capital necessary to purchase at least 51% of the shares.

Which is a lot of money.

It can be done, but it's not easy to stuff that genie back in the bottle. A company that's already focused on ensuring dividends and capital gain are aimed at the shareholders is one that's not going to be paying their employees enough to build up those funds, you know?

It's not feasible unless the founder/heirs have stayed wealthy enough in their own right to buy it all back, or if the stock price plunges so low that the employees can purchase it all at rock bottom prices and then build it back from the ground up.