don t confuse a leveraged buyback with a leveraged buyout while the former involves the repurchase of corporate shares the latter involves the use of debt to acquire another company 
leveraged buybacks and epsboosting eps through leveraged buybacks can be an effective tool for companies to use but it does not signify an improvement in underlying performance or value it can even do damage to the business if financial engineering comes at the expense of not investing capital productively for the long term executives say there are not enough investment opportunities but there is clearly a big conflict of interest given that executive compensation is linked to eps in most american companies financial markets have rewarded companies using buybacks as a substitute for improving operational performance so it is no wonder that buybacks became one of wall street s favorite tools since the global financial crisis between 2008 and 2018 companies in the united states spent over 5 trillion buying back their own stock or over half their profits and for large companies like procter gamble mondelez and eli lilly approximately 40 of eps growth has been a result of buybacks buybacks are a mixed bag they can increase eps and improve other financial metrics but also put a firm s credit ratings at risk leveraged buyback returnsin 2017 leveraged buybacks were reported to have made a big comeback in the u s where share repurchases have exceeded free cash flow since 2014 they were also used to avoid having to repatriate cash and pay u s taxes the buyback boom increased the risk for both bondholders and shareholders even investment grade companies were willing to sacrifice their credit ratings in order to reduce the number of shares for example mcdonald s whose executives depend on eps metrics as a component of their performance incentive payout had borrowed so heavily to fund buybacks that its credit rating fell from a to bbb between 2016 and 2018 rising interest rates can impact leveraged buybacks but so could politicians the inflation reduction act of 2022 which was signed into law by president joe biden on aug 16 2022 includes an excise tax of 1 on share buybacks that exceed 1 million after dec 31 2022 senate democrats strongly criticized the buyback boom arguing that trump s tax reform didn t trickle down to workers they wanted to regulate buybacks which were seen as a form of market manipulation before the securities and exchange commission sec gave them the green light in 1982 when it adopted rule 10b 18 that protected corporations from charges of stock market manipulation if buybacks on any given day are no more than 25 of the previous four weeks average daily trading volume biden 2023 state of the union addressin his state of the union address in february 2023 president biden said he would propose quadrupling the tax on corporate stock buybacks it was not clear from his statements whether such a proposal would also impact leveraged buybacks further analysts like evercoreisi strategist tobin marcus suggested that the likelihood of the passage of a buyback tax was low still investors may keep future buyback related legislation in mind when developing strategies biden s announcement follows a dec 2021 push from sec commissioner allison herren lee in support of corporate share repurchase policies enhancing transparency by requiring more detailed timely and structured disclosures of buybacks 