A leveraged buyback is a financial deal where a company buys back some of its own shares, but uses debt to do so. Leveraged buybacks are an attractive option to companies when their stock prices are considerably undervalued, allowing them to acquire these shares cheaply. As the number of outstanding shares is reduced, the remaining owners' shares become more valuable. Companies often use leveraged buybacks in an attempt to protect themselves from hostile takeovers or to increase asset values.

Buybacks are widely considered to be beneficial to shareholders, who are directly impacted by the repurchasing of their own company’s shares as the share price and values increase as fewer shares are in circulation. Companies may also look to release the company's retained earnings to the market and the net-income life span, giving them the opportunity to utilize their capital more effectively. Leveraged buybacks give a boost to the possible return on equity (ROE) and earnings per share (EPS) ratios and these are the most noticeably useful aspects of this strategy from the shareholders’ view.

The Inflation Reduction Act of 2022 includes a provision for a levy on certain types of share buybacks. The 1% excise tax has been brought in for companies that complete a leveraged buyback of their shares. This means that the company will be taxed on the value of the repurchased shares. This, in turn, reduces the earnings per share and the company’s overall financial metrics. This essentially means that companies must weigh up their motives for doing a leveraged buyback and whether the cost of that outweigh the benefits.

It’s also important to consider that leveraged buybacks also result in increased debt on the balance sheet of the company, which can impact negatively on the liquidity of the company and potentially, its ability to carry out future operations. In addition, it may result in the company over-leveraging its balance sheet, meaning that the company may be unable to adequately cover its repayment obligations and will be more prone to default.

In conclusion, while leveraged buybacks can make sound financial sense in the right circumstances, companies need to understand the risks involved in taking on debt to finance such transactions. The decision to go down the leveraged buyback route should be well thought out and there must be a clear business case in place for such a move to ensure that the company’s shareholders are maximising the benefits from the buyback.