What Is a Buyout, With Types and Examples

A buyout occurs when a buyer—such as an individual, a group of investors, a private equity firm, or another company—purchases a significant portion or all of a company’s shares or assets to gain control. The target company may be publicly traded or privately held, and the buyout can involve acquiring equity (ownership stakes) or key operational assets. The primary goal of a buyout is to assume control of the company’s strategic direction, operations, or financial structure, often with the intent to improve profitability, restructure operations, or prepare the company for resale at a higher value.

Buyouts differ from mergers, where two companies combine to form a new entity, or minority investments, where the buyer acquires a non-controlling stake. In a buyout, the buyer typically seeks majority ownership (more than 50% of voting shares) or full ownership (100% of the company). The transaction can be friendly, with the target company’s management approving the deal, or hostile, where the buyer pursues control against the wishes of the target’s leadership.

The motivations behind buyouts vary. Buyers may see untapped potential in the target company, such as undervalued assets, strong cash flows, or opportunities for operational improvements. Alternatively, buyouts can serve as exit strategies for existing owners, allowing founders, early investors, or shareholders to cash out. In some cases, buyouts are driven by competitive pressures, such as consolidating market share or eliminating rivals.

Types of Buyouts

Buyouts come in several forms, each with distinct characteristics, financing structures, and implications. Below are the primary types of buyouts, along with their defining features.

1. Leveraged Buyout (LBO)

A leveraged buyout (LBO) is one of the most common types of buyouts, particularly in private equity. In an LBO, the buyer uses a significant amount of borrowed funds (debt) to finance the acquisition, with the target company’s assets or cash flows often serving as collateral. The buyer contributes a smaller portion of equity, leveraging debt to amplify potential returns.

LBOs are attractive because they allow buyers to acquire large companies with relatively little upfront capital. After the acquisition, the buyer typically aims to improve the company’s performance—through cost-cutting, operational efficiencies, or revenue growth—to increase its value. The debt is repaid over time using the company’s cash flows or by selling assets. However, LBOs carry risks: if the company underperforms, high debt levels can lead to financial distress or bankruptcy.

Example: One of the most famous LBOs is the 1989 acquisition of RJR Nabisco by Kohlberg Kravis Roberts & Co. (KKR) for $25 billion. KKR used substantial debt to finance the deal, aiming to restructure the tobacco and food conglomerate. The transaction, chronicled in the book Barbarians at the Gate, highlighted both the potential rewards and risks of LBOs, as KKR faced challenges managing the debt burden but ultimately profited from asset sales and operational changes.

2. Management Buyout (MBO)

A management buyout (MBO) occurs when a company’s existing management team purchases a controlling stake, often with the support of external financiers like private equity firms or banks. MBOs typically happen when managers believe they can unlock greater value by running the company independently, free from the constraints of parent organizations or public shareholders.

MBOs are often financed similarly to LBOs, with a mix of debt and equity, but the key difference is the involvement of the management team as buyers. Managers may contribute personal funds or receive equity incentives as part of the deal. MBOs can boost morale and align incentives, as managers gain ownership stakes, but they also require managers to navigate the complexities of ownership while maintaining day-to-day operations.

Example: In 2013, the management team of Dell Inc., led by founder Michael Dell, executed an MBO to take the company private for $24.4 billion, with support from Silver Lake Partners. Frustrated by public market pressures and declining PC sales, Dell believed privatization would allow greater flexibility to pivot toward enterprise solutions and cloud computing. The MBO succeeded, and Dell later returned to public markets in 2018 after significant growth.

3. Employee Buyout (EBO)

An employee buyout (EBO) involves employees collectively purchasing the company, often through an employee stock ownership plan (ESOP). EBOs are less common but can occur when a company faces closure, divestiture, or ownership transition, and employees seek to preserve jobs and maintain operations. Financing for EBOs may come from employee contributions, loans, or government support.

EBOs empower workers by giving them a stake in the company’s success, potentially improving productivity and morale. However, they can be challenging to execute due to employees’ limited financial resources and the need for effective governance structures.

Example: In 1987, United Airlines’ pilots, mechanics, and other employees attempted an EBO to buy the airline for $6.8 billion through an ESOP. While the deal initially aimed to give employees control and protect jobs, it faced financing hurdles and was abandoned. However, a later 1994 ESOP deal succeeded, making United Airlines one of the largest employee-owned companies at the time, though subsequent financial struggles highlighted the risks of EBOs.

4. Corporate Buyout

A corporate buyout occurs when one company acquires another to gain control, often as part of a broader strategic plan. Unlike LBOs or MBOs, corporate buyouts are typically funded by the acquiring company’s cash reserves, stock, or a combination of both, rather than heavy debt. These buyouts may target competitors, suppliers, or companies in adjacent industries to achieve synergies, expand market share, or diversify offerings.

Corporate buyouts can be friendly or hostile. In a friendly buyout, both companies’ boards agree to the terms. In a hostile buyout, the acquirer bypasses management, appealing directly to shareholders through a tender offer or proxy fight.

Example: In 2018, The Walt Disney Company acquired 21st Century Fox’s entertainment assets for $71.3 billion in a corporate buyout. The deal allowed Disney to expand its content library, including Marvel, Star Wars, and Avatar franchises, and bolster its streaming service, Disney+. The buyout was friendly, with Fox’s leadership supporting the transaction as a strategic move to focus on news and sports assets.

5. Private Equity Buyout

A private equity buyout involves a private equity firm acquiring a company, often with the goal of restructuring it and selling it later for a profit. These buyouts frequently resemble LBOs, as private equity firms use debt to finance acquisitions, but they are distinct in their focus on long-term value creation. Private equity firms typically hold companies for 3–7 years, implementing operational improvements, cost reductions, or growth strategies before exiting through a sale or public offering.

Private equity buyouts are prevalent in industries with stable cash flows, such as healthcare, retail, or manufacturing, where firms can optimize operations and manage debt effectively.

Example: In 2007, private equity firms TPG Capital and Goldman Sachs acquired Alltel Corporation, a U.S. wireless carrier, for $27.5 billion. The firms streamlined Alltel’s operations and sold it to Verizon Wireless in 2008 for $28.1 billion, generating a profit despite a short holding period. The deal showcased private equity’s ability to capitalize on undervalued assets in competitive markets.

Key Considerations in Buyouts

Regardless of the type, buyouts involve several critical factors that influence their success:

Valuation: Determining the target company’s worth is crucial. Buyers analyze financial metrics like revenue, earnings, and cash flow, as well as intangible factors like brand value or market position. Overpaying can strain finances, while undervaluing may lead to missed opportunities.
Financing: Buyouts require substantial capital, often sourced from debt, equity, or a combination. The financing structure impacts the deal’s risk and return profile. For instance, high debt in LBOs increases potential returns but also financial risk.
Due Diligence: Buyers conduct thorough investigations to assess the target’s financial health, legal liabilities, and operational risks. Poor due diligence can lead to unforeseen challenges, such as hidden debts or regulatory issues.
Stakeholder Impact: Buyouts affect shareholders, employees, customers, and creditors. For example, cost-cutting post-buyout may lead to layoffs, while successful turnarounds can create jobs and shareholder value.
Regulatory Approval: Large buyouts, especially corporate ones, may require approval from antitrust authorities to prevent monopolies or market distortions. Delays or rejections can derail deals.

Benefits and Risks of Buyouts

Buyouts offer significant benefits but also carry risks for all parties involved.

Benefits:

Value Creation: Buyouts can unlock a company’s potential through better management, strategic pivots, or operational efficiencies.
Exit Opportunities: Founders and early investors can monetize their stakes, providing liquidity for new ventures or retirement.
Market Consolidation: Corporate buyouts can strengthen industries by combining complementary businesses, reducing competition, or achieving economies of scale.
Employee Ownership: MBOs and EBOs align incentives, fostering a culture of accountability and shared success.

Risks:

Financial Strain: High debt levels in LBOs or private equity buyouts can lead to insolvency if cash flows falter.
Cultural Clashes: Merging different corporate cultures, especially in corporate buyouts, can disrupt operations and morale.
Market Risks: Economic downturns or industry shifts can undermine the target company’s value post-buyout.
Reputational Concerns: Hostile buyouts or aggressive cost-cutting can damage relationships with customers, employees, or regulators.

Real-World Impact of Buyouts

Buyouts have reshaped industries and economies over decades. The 1980s saw a surge in LBOs, driven by private equity pioneers like KKR, which transformed corporate America by emphasizing efficiency and shareholder value. In the tech era, corporate buyouts like Facebook’s acquisition of Instagram (2012, $1 billion) and Google’s purchase of YouTube (2006, $1.65 billion) demonstrated how buyouts fuel innovation and market dominance. Meanwhile, MBOs and EBOs have empowered managers and workers in sectors like manufacturing and retail, preserving jobs and local economies.

Recent trends show buyouts adapting to new realities. In 2023–2024, private equity firms focused on healthcare and technology buyouts, targeting companies with resilient cash flows amid economic uncertainty. Sustainability-driven buyouts also emerged, with buyers acquiring renewable energy firms to capitalize on the global shift toward green technologies.

Conclusion

A buyout is more than a financial transaction—it’s a strategic maneuver that can redefine a company’s trajectory, reshape industries, or empower stakeholders. Whether through a leveraged buyout unlocking hidden value, a management buyout fostering independence, or a corporate buyout driving market consolidation, these deals reflect the complex interplay of finance, strategy, and ambition.