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Buyouts, Acquisitions & Going Private

A buyout, also known as an acquisition, occurs when a new owner manages to purchase a controlling interest in a company. In the case of a public company, a controlling interest would consist of at least 50% of all shares, thus giving the buyer an ownership stake and allowing them to out-vote any other owners. Buyouts can happen with private companies or public companies, though when a buyout occurs at a publicly-traded company, it may precipitate the company de-listing from the stock exchange and going private instead. The entire private equity industry is based upon the idea of buyouts, as they seek out underperforming companies to invest in, acquire control, take private, and either sell to another buyer or take the company public again in order to profit from their investment.

In a management buyout (MBO), the stake is bought by the firm’s management. MBOs often provide an exit strategy for managers at large corporations who want to sell off divisions that are not as profitable or that are no longer part of their core business. In other cases, the owners simply might wish to retire. The financing required for an MBO is typically quite substantial and is formed by a combination of debt and equity that is derived from the buyers, financiers, and sometimes even the seller. The overall process of a management buyout is similar to that of a private equity buyout, in that both rely on large amounts of debt. However, unlike private equity buyouts, management buyouts are undertaken by company insiders who are already intimately familiar with the business.

When a buyout uses a significant amount of borrowed money or debt, it is known as a leveraged buyout (LBO). This high-risk strategy may have high rewards if executed correctly. The acquisition must realize high returns and stable cash flows in order to pay down the debt as well as the significant interest on said debt. The target company’s assets are often provided as collateral for the debt, and buyout firms sometimes sell parts of the target company to pay down these costs.

When a company goes private, all shareholders are paid out for their shares by the buying entity. Often, the buyer will even pay a premium, paying well over market value for the shares. Thus, buyouts can be a major boon for investors, although of course, they will no longer hold the asset in the long term. In the time between the announcement of a buyout and the actual purchase of shares, stock prices do often rise as investors know that they can profit from the ownership of these shares.