Buffett on shares buy back by companies

I was reading last weekend Warren Buffett’s 1980 letter to Berkshire Hathaway shareholders, when I encountered the following passage about shares buy back by a company (emphasis is mine):

“One usage of retained earnings we often greet with special enthusiasm when practiced by companies in which we have an investment interest is repurchase of their own shares. The reasoning is simple: if a fine business is selling in the market place for far less than intrinsic value, what more certain or more profitable utilization of capital can there be than significant enlargement of the interests of all owners at that bargain price? The competitive nature of corporate acquisition activity almost guarantees the payment of a full – frequently more than full price when a company buys the entire ownership of another enterprise. But the auction nature of security markets often allows finely-run companies the opportunity to purchase portions of their own businesses at a price under 50% of that needed to acquire the same earning power through the negotiated acquisition of another enterprise.”

Then, sometimes, we see companies that decide to hold excess cash while waiting for opportunities of what to do with it, or to protect themselves against uncertainty, etc. Some do as Buffett says and buy back at minimum prices. Others do the contrary, they buy back shares at maximum prices.

There is always an explanation to taking one option or the other, even if the final reason is not always told, understood…