Buyout Meaning

Buyout is the process of acquiring a controlling interest in a company, either via out-and-out purchase or through the purchase of controlling equity interest. The underlying principle is that the acquirer believes that the target company’s assets are undervalued.

Usually, buyout takes place when a purchaser acquires more than 50% stake in the target company resulting in a change of management control. In case the stake is acquired by the company’s own management, then it is known as a management buyoutManagement BuyoutA management buyout (MBO) is a type of acquisition where the management of the company acquires the ownership of the business by increasing their equity stake or by purchasing assets and liabilities with the objective of leveraging their expertise to grow the company and drive it forward using own more (MBO). On the other hand, if the acquisition is funded through a significant level of debt, then it is known as a leveraged buyoutLeveraged BuyoutLBO (Leveraged Buyout) analysis helps in determining the maximum value that a financial buyer could pay for the target company and the amount of debt that needs to be raised along with financial considerations like the present and future free cash flows of the target company, equity investors required hurdle rates and interest rates, financing structure and banking agreements that lenders more (LBO). Usually, companies opting to be private go for buyouts.

Buyout Process

The process is initiated by the interested acquirer who makes a formal buyout offer to the management of the target company. It is then followed by rounds of negotiations between the acquirer and the management of the target company, after which the management share their insights with the shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total more and advise them on whether or not to sell their shares.

In some cases, the management of the target company are not very willing to go ahead with the acquisitionAcquisitionAn acquisition is defined as the act of taking over or gaining control of all or most of another entity's stocks by purchasing at least fifty percent of the target company's stock and other corporate assets. read more, and such buyouts are considered to be hostile takeovers, while, the rest is seen to be friendly takeoversFriendly TakeoversA friendly takeover occurs when the target company peacefully accepts the acquisition offer. The takeover is subject to the approval of the target company's shareholders as well as regulatory approval to ensure that the acquisition complies with antitrust more. The funding used in transactions is usually provided by private wealthy individuals, private equity investors, companies, pension fundsPension FundsA pension fund refers to any plan or scheme set up by an employer which generates regular income for employees after their retirement. This pooled contribution from the pension plan is invested conservatively in government securities, blue-chip stocks, and investment-grade bonds to ensure that it generates sufficient more and other financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more.

Types of Buyout

There are two major types – Management and Leveraged buyout.


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  1. Management: Here, the existing management of the company gains control of the company from its owners through the purchase of management control. Basically, the management finds the potential of the company to be attractive and hence intend to earn higher returns by becoming owners instead of employees of the company.
  2. Leveraged: In this type, a significant portion of the acquisition is backed by debt. As the acquirer gains control of the target company, its assets are often used as collateral for the debt. In this way, the purchasers can acquire companies that are quite large as compared to their funding ability.

Examples of Buyout

Example #1

In the year 2013, Michael Dell got involved in one of the nastiest Tech buyouts. The founder of Dell joined hands with a private equity firm, Silver Lake Partners, and paid $25 billion to buy out the company that he had originally founded. In this way, Michael Dell took it private so that he had better control over the company operations. This is a classic example of a management buyout.

Example #2

In the year 2007, Blackstone Group acquired Hilton Hotels in a $26 billion LBO deal. The deal meant that each shareholder got a 40% premium over the prevailing share price. The acquisition was largely backed by debt funding of $20.5 billion while the remaining was in the form of equity by Blackstone. Some of the banks in the consortium lending included Bank of America, Lehman Brothers, Goldman Sachs and Morgan Stanley.



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