Buyout

A buyout is a purchase of an entire company or of a controlling interest in a company by another company. The purchase is usually viewed as an investment. A buyout can take a number of forms. Small business buyouts are common in capitalist countries. Most businesses are small entrepreneurial operations. They may be as simple as a “mom and pop” store, a franchise, a motel, or another small business that has been able to produce enough business to gain the owners enough net profit for living and for reinvesting. Sale of their business may be for any number of reasons: health, age, a desire to return to their home country, or to change careers.

The buyouts that usually attract the most public attention are corporate buyouts. These types of purchases have been made since the beginning of corporate capitalism. In some cases, the purchases are of bankrupt companies. In others, the buyouts are of companies in financial distress because of a crisis in its product, financing, or labor relations. Or it may be that the company is an agribusiness that has been broken by a bad harvest.

Corporate buyouts can happen when companies see an opportunity to purchase a company with something of significant value to the buying corporation. The buyout may be to gain market share, or to gain access to technology developed or held by the corporation being sought, or to eliminate technology, or to obtain assets held by the purchased company. In the latter case, a company that owns oil fields may be an attractive buyout target because the buyer can add the assets to its balance sheet. The oil can be pumped and the reduction in the assets value charged against taxes.

Buyouts have been conducted by corporate raiders who seek to capture a company in a hostile takeover and then to use the assets for other purposes. In some cases, buyouts may be made in order to break up a company and sell its units because the parts of the company are worth more than the company as a whole. Leveraged buyouts have been common in recent decades. In some cases, the stock of the company acquired in the acquisition is turned into junk by the wholesale mortgaging of the company, making its own bonds into junk bonds. In other cases, loans that are treated as assets are used to create several layers of borrowing to make the purchase of a company valued in the billions of dollars.