A buyout is the acquisition of a controlling interest in a company and is used synonymously with the term acquisition. If the stake is bought by the firm’s management, it is known as a management buyout and if high levels of debt are used to fund the buyout, it is called a leveraged buyout. Buyouts often occur when a company is going private.
Key Takeaways
A buyout is the acquisition of a controlling interest in a company and is used synonymously with the term acquisition.
If the stake is bought by the firm’s management, it is known as a management buyout, while if high levels of debt are used to fund the buyout, it is called a leveraged buyout.
Buyouts often occur when a company is going private.
Buyouts occur when a buyer acquires more than 50% of the company, leading to a change of control. Firms that specialize in funding and facilitating buyouts, act alone or together on deals, and are usually financed by institutional investors, wealthy individuals, or loans.
In private equity, funds and investors seek out underperforming or undervalued companies that they can take private and turn around, before going public years later. Buyout firms are involved in management buyouts (MBOs), in which the management of the company being purchased takes a stake. They often play key roles in leveraged buyouts, which are buyouts that are funded with borrowed money.
Many partnerships include clauses called buy-sell agreements or shotgun clauses which can force the other partners to agree to buying out an offering partner. The clause can also force partners to sell their shares.
Sometimes a buyout firm believes it can provide more value to a company’s shareholders than the existing management.
Types of Buyouts
Management buyouts (MBOs) provide an exit strategy for large corporations that want to sell off divisions that are not part of their core business, or for private businesses whose owners wish to retire. The financing required for an MBO is often quite substantial and is usually a combination of debt and equity that is derived from the buyers, financiers, and sometimes the seller.
Leveraged buyouts (LBO) use significant amounts of borrowed money, with the assets of the company being acquired often used as collateral for the loans. The company performing the LBO may provide only 10% of the capital, with the rest financed through debt. This is a high-risk, high-reward strategy, where the acquisition has to realize high returns and cash flows in order to pay the interest on the debt. The target company's assets are typically provided as collateral for the debt, and buyout firms sometimes sell parts of the target company to pay down the debt.
Examples of Buyouts
In 1986, Safeway's board of directors (BOD) avoided hostile takeovers from Herbert and Robert Haft of Dart Drug by letting Kohlberg Kravis Roberts complete a friendly LBO of Safeway for $5.5 billion. Safeway divested some of its assets and closed unprofitable stores. After improvements in its revenues and profitability, Safeway was taken public again in 1990. Roberts earned almost $7.2 billion on his initial investment of $129 million.
In another example, in 2007, Blackstone Group bought Hilton Hotels for $26 billion through an LBO. Blackstone put up $5.5 billion in cash and financed $20.5 billion in debt. Before the financial crisis of 2009, Hilton had issues with declining cash flows and revenues. Hilton later refinanced at lower interest rates and improved operations. Blackstone sold Hilton for a profit of almost $10 billion.
A buyout is the acquisition of a controlling interest in a company and is used synonymously with the term acquisition. If the stake is bought by the firm's management, it is known as a management buyout
management buyout
What Is a Management Buyout (MBO)? The term management buyout (MBO) refers to a financial transaction where someone from corporate management or the team purchases the business from the owner(s). Management members that execute MBOs purchase everything associated with the business.
For example, three doctors could form a joint practice, and the doctors can agree to a buyout agreement where all remaining doctors can buy a doctor's ownership for $1,000,000 upon retirement.
Take-private, corporate carve-out, buy & build, and distressed-for-control are great buyout strategies. While they offer superior returns, there are plenty of deals that just don't fall into these categories. Another way for private equity firms to achieve superior returns is to specialize in a particular sector.
A buyout fund is a type of private equity fund that typically seeks to gain controlling or majority (>50%) ownership of a company, with the goal of creating value by improving the operations of the company.
After improvements in its revenues and profitability, Safeway was taken public again in 1990. Roberts earned almost $7.2 billion on his initial investment of $129 million. In another example, in 2007, Blackstone Group bought Hilton Hotels for $26 billion through an LBO.
Employee buyouts are used to reduce employee headcount and, thus, salary costs, the cost of benefits, and any contributions by the company to retirement plans. A common formula for severance packages includes a base of four weeks pay plus an additional week for every year of employment at the company.
The money to be used in buyout transactions is usually supplied by private individuals, companies, private equity firms, lenders, pension funds, and other institutions.
For example, a distressed debt fund may acquire a significant portion of a struggling company's debt at a discounted price. This acquisition not only injects capital into the business but also positions the fund as a key player in the restructuring process, potentially leading to a successful buyout.
What Are Buy-Sell Agreements? Buy-Sell agreements or “forced buyouts” are one way for the majority to force out a minority. This allows a majority to force a minority to sell their shares often in the context of a company-wide buyout.
Definitions of strategic buyout. an acquisition based on analysis of the benefits of consolidation in anticipation of increased earning power. type of: buyout. acquisition of a company by purchasing a controlling percentage of its stock.
In the realm of financial agreements and contractual dealings, the buyout option stands as a pivotal clause. It's a mechanism that grants individuals or entities the right to purchase something at a predetermined price within a specified period.
As of February 2024, the largest ever acquisition was the 1999 takeover of Mannesmann by Vodafone Airtouch plc at $183 billion ($334.7 billion adjusted for inflation). AT&T appears in these lists the most times with five entries, for a combined transaction value of $311.4 billion.
MBO Example: Michael Dell and Silver Lake (Take-Private)
The buyout was estimated to be worth $24.4 billion, with the take-private rationale per Michael Dell being that he could now exert more control over the direction of the company.
As a result, the payments are treated as gross income and are taxable in the tax year in which the payouts are received. Often times, the taxes are withheld before the former employee receives the payment; sometimes a company will include an added amount in an effort to help cover the taxes to be paid.
A “Buyout” situation applies when a faculty member is granted a course release in order to accommodate a faculty member's work on an externally funded project. The corresponding percentage of the faculty's appointment is directly charged (accounted for) to the grant account (budget) during the term of the buyout.
A buyout refers to an investment transaction where one party acquires control of a company, either through an outright purchase or by obtaining a controlling equity interest (at least 51% of the company's voting shares).
There are four main leveraged buyout scenarios: the repackaging plan, the split-up, the portfolio plan, and the savior plan. The repackaging plan involves buying a public company through leveraged loans, making it private, repackaging it, then selling its shares through an initial public offering (IPO).
An employee buyout (EBO) is a restructuring strategy used by employers to reduce costs and avoid potential layoffs. It is generally done by offering employees voluntary severance packages. If the package is accepted, the employee must leave the organization.
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