When a company decides to distribute money to its investors it usually pays out dividends, but not always. An alternative to paying out a dividend is to actually repurchase some shares that are in the market. With a share repurchase the investors are turning in those shares for money distributed by the company. The effect of share repurchases is that the number of shares in circulation diminishes, so it can be interesting to do when the management wants to reshuffle the control structure in a company especially when they think that their company is undervalued by the market. Shareholders that do not sell their shares hold after the repurchase a larger percentage of the shares in the company, so the shareholders who keep their shares get a bigger decision power in a company which they think is undervalued.
What is interesting for us with shares repurchases is that the company does make a public offering about the tender price at which it will buy the shares. So you do know beforehand the price at which the shares can be sold on a future date. But it is funny enough that not all shares will be repurchased. In short the market overreacts to the repurchase offer and they always go too high in value just a few days before the repurchase. The shares then stay overpriced for a few days, leaving you the opportunity to sell them and earn a nice little gain. This pattern occurs every time when a share repurchase occur so you can exploit this mispricing and trade with nearly 100% guarantee that your deal will be in the money ! This is called an arbitrage opportunity.
Two finance professors from INSEAD have actually defined a trading rule around this, and one of them, Theo Vermaelen, has been fairly successful as an investor using this strategy to trade in the market.
Without going too much into details the trading rule that involves you buying shares six days prior to the expiration of the repurchase offer if the stock price is at least 3% below the tender price. Then you should tender those share (and then make 3% profit) or sell the shares than cannot be tendered on the market after the expiration of the tender offer, and then you also make a profit !
You can see more details about this trading strategy in the research article from Theo Vermaelen and Urs Peyer following the link here.