A company buyout is a process through which a company, party, or group gains controlling interest in another by purchasing shares of the other company. This results in a situation in which the buying company has a majority share of the other company’s stock. Through the purchase of these shares, the buying company essentially gains control of the other company. Sometimes a company buyout is referred to as a leveraged buyout, which involves borrowed funds for the buyout. In other cases, however, a company buyout may be referred to as a management buyout.
With a leveraged company buyout, there is usually a significant amount of borrowed money involved. In such a case, a company or group borrows money to buy a majority share of stock in the other company. Borrowing the required amount means the company that is attempting the buyout does not have to tie up a large amount of its capital to acquire the other company. Interestingly, the company that is planning to buy the shares may even be able to use the other company’s assets as collateral for securing the desired loan.
In many cases, a company that accomplishes a leveraged buyout makes the company private once the buyout process is complete and it has control. This act allows the takeover company to enjoy more control over the company after its purchase. For example, the new owners may decide to sell off the company’s assets in an effort to earn a profit and dissolve the company. They may even split the original company up into different companies.
A management buyout is another type of company buyout. With this type, a company’s managers buy a majority share of the company’s stock from its shareholders. As with leverage buyouts, the company is often made private after the buyout is complete. In this case, however, the purpose isn’t usually to split the company or sell off its assets. Instead, the managers usually make the company private because they feel they have the ability to improve it if they have more control over it. In some cases, this is true because the managers have often spent years developing their expertise with the company.
In many cases, the need for a large amount of capital causes issues for those hoping to accomplish management buyouts. A team of managers may seek a loan from a bank, but banks are often hesitant about financing management buyouts. In the end, they may find venture capitalists more willing.