A buyout involves the acquisition of a majority of the voting shares of a business. The intent of a buyout is to gain control over the operating and financial decisions of an acquiree. An acquirer may engage in a buyout for a number of reasons, including the following:
- To acquire control over a key product
- To gain ownership of certain rights, such as airport gate leases
- To prevent technology from being made available to competitors
- To gain entry into a new market
Buyouts are especially useful when an acquirer does not want to spend the time to build a business from scratch in a new market. Instead, it can gain instant entry by acquiring an organization that is already competing in that market.
A leveraged buyout occurs when borrowed funds are heavily used to acquire majority control over a business. These transactions can be risky, since the acquired entity may not generate a sufficient amount of cash flow to subsequently pay off the debt.