Buyouts. Leveraged buyouts. Management buyouts

The purchase of a company's shares in which the acquiring party gains controlling interest of the targeted firm.

A management buyout (MBO) is a form of acquisition where a company's existing managers acquire a large part or all of the company.

The particular nature of the MBO lies in the position of the buyers as managers of the company, and the practical consequences that follow from that. In particular, the buyers already have full knowledge of the company available to them.

The purpose of such a buyout from the managers' point of view may be to save their jobs, either if the business has been scheduled for closure or if an outside purchaser would bring in its own management team. They may also want to maximize the financial benefits they receive from the success they bring to the company by taking the profits for themselves. This is often a way to ward off aggressive buyers.

In the UK, New Look was the subject of a management buyout in 2004 by Tom Singh, the founder of the company who had floated it in 1998.

Leveraged Buyout

A leveraged buyout occurs when an entity is able to take controlling interest of a company stock by financing a large portion of these funds. The assets of the purchased company are used as assets for collateral against the loan to purchase the company. A leveraged buyout (or LBO, or highly leveraged transaction (HLT), or "bootstrap" transaction) occurs when an investor, typically a financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage (borrowing). The assets of the acquired company are used as collateral for the borrowed capital, sometimes with assets of the acquiring company. Typically, leveraged buyout uses a combination of various debt instruments from bank and debt capital markets. The bonds or other paper issued for leveraged buyouts are commonly considered not to be investment grade because of the significant risks involved.

Companies of all sizes and industries have been the target of leveraged buyout transactions, although because of the importance of debt and the ability of the acquired firm to make regular loan payments after the completion of a leveraged buyout, some features of potential target firms make for more attractive leverage buyout candidates, including:

• Low existing debt loads;

• A multi-year history of stable and recurring cash flows;

• Hard assets (property, plant and equipment, inventory, receivables) that may be used as collateral for lower cost secured debt;

• The potential for new management to make operational or other improvements to the firm to boost cash flows, such as workforce reductions or eliminations;

• Market conditions and perceptions that depress the valuation or stock price.