Buyout

A buyout is an investment transaction where the acquisition of a controlling interest or complete ownership in a company is made. The acquirer thereby “buys out” the present equity holders of the target company. In the M&A arena, the term buyout is used synonymously with the term acquisition. For details of current buyouts of a variety of firms, traders can scroll through our cash deals page for additional details. A buyout involves the process of gaining a controlling interest in another company and usually occur when acquirer believes the assets of a target are undervalued. The process can be a friendly takeover or a hostile takeover. Additional reasons for a buyout may include

- new market entry
- better operational efficiency
- higher revenues
- less competition (see horizontal mergers)

Buyouts take place as a result of the purchaser’s belief that the transaction creates value for shareholders of a company. Specifically, more than what is possible under the target company’s current management. Although, there are many examples of management hubris and ego being the primary drivers for embarking on an acquisition spree. Both sides will see advantages and disadvantages. There are several things that need to be taken into consideration to make the transaction successful. For more in depth analysis on buyouts, see our article Acquisition Examples – A Guide to Corporate Takeovers. The term is also frequently cited in our article The Differences Between Mergers and Acquisitions – Examples & Explanations.

Buyout in Action

If the target firm is acquired by the firm’s own management in a going private transaction, the acquisition is known as a Management Buyout (MBO). This may be advantageous when continuity of ownership and control are required but the company needs to be away from the spotlight of short-termism sometimes associated with the stock market.

If a relatively high level of debt is used to fund the purchase, known as leverage, usually by a private equity fund, it is called a Leveraged Buyout (LBO). These acquisitions often include the purchasing of the target company’s outstanding debt, which is referred to as “assumed debt” by the purchaser. Private equity firm KKR are well known buyout specialists and spend a great deal of resources searching for undervalued of poorly performing targets to take private using large amounts of borrowed capital. One of the most famous buyout examples was the KKR purchase of RJR Nabisco for $26bn in 1982. Due to the bidding war, the final price paid proved to be a winners curse and the profitability of the deal was ultimately judged to be a failure.

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Buyout in Action

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