What is a Buyout?

Buyout simply means buying out the existing shareholders of a company in order to acquire a controlling interest in that company. Controlling interest means having more than 50% of voting rights in the company and therefore can direct the course of a company and make the most strategic and operational decisions.

There are two types of Buyouts: Management Buyouts and Leveraged buyouts

Management Buyouts (MBO)

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When the existing management of a company purchases the whole or substantial portion of the company from its private owners or the parent company, it is termed as Management Buyouts. It is an attractive option for the managers as this provides them with an opportunity to get a share in the profits of the company as owners instead of getting regular paychecks as employees.

An MBO is also preferred as an exit strategy for the private companies in which owners want to retire or for large corporations that want to sell off their non-core business divisions. These buyouts often require huge amounts of financing, which is usually a combination of debt and equity.

An example of Management Buyout

Let us say a company, being in the business of beverages, also has a division to produce candies. The company now only wants to concentrate on its core offerings of beverages and decides to sell that division. Managers in the candy division, after considering the growth potential in the candy business, offer the parent company to buy its candy division and if the deal goes through, such a transaction would be a management buyout.

Leveraged Buyouts (LBO)

A Leveraged buyout is the acquisition of another company, wherein the cost of acquisition is being financed substantially from the borrowed funds. The assets of the company being acquired are often offered as collateral for the borrowings, along with the assets of the acquiring company. A leveraged buyout allows a company to make large acquisitions without the need to commit huge amounts of capital.

In a Leveraged Buyout, there is usually a ratio of 90% debt to 10% equity.


An example of Leveraged Buyout

In the year 2000, Tata Global Beverages (formerly known as Tata Tea) acquired the iconic Tetley brand at a cost of Euro 251 Million. Out of this Euro 251 Million, Euro 235 million were financed by debt and the remaining Euro 16 Million from equity. This LBO allowed Tata Global beverages to acquire Tetley without committing huge amounts of capital and at the same time limiting their liability to the extent of equity provided.

Successful Buyout by Indian Companies

Target CompanyCountryIndian CompanyValue
TetleyUnited KingdomTata Tea$271 million
Whyte & MackayUnited KingdomUB Group$550 million
CorusUnited KingdomTata Steel$11.3 billion
Hansen TransmissionsNetherlandsSuzlon Energy$465 million
American AxleUSATata Motors$2 billion

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