Various "flavors" of corporate buyouts exist. Maybe you've heard of a leveraged buyout. That means the purchase of a company through its assets and a large number of stocks that the company owns. Or perhaps you've read in the business press about management buyouts. That's when management purchases enough stock to gain a controlling interest in the company from shareholders. While many are all too familiar with the downside of buyouts, few understand the advantages of buyouts.
A company that has been struggling with its management will most likely be evaluated upon a buyout. Since buyouts typically will change the corporate structure of a company, most executive staff members will be replaced by the buying company's own staff. This type of change can help remove unnecessary positions, change management styles to more-successful forms of leadership and reform any underperforming management styles.
When corporations take over smaller companies, typically the smaller company has a high debt-to-equity ratio, meaning it's been aggressively financing its operation -- and racking up debt -- via a lot of outside financing. This enables larger corporations to take over smaller companies with little capital required for the buyout. If the company's returns are higher than the amount financed to cover the debt, then shareholders in that company will get greater returns, and the value of the company will increase overall.
Shareholders don't necessarily lose out on what they have purchased when a company they've invested in is bought. Rather, their stocks are transferred to the new company. Any potential risk inherent in that transfer is mitigated by the fact that if the company remains strong and continues to grow, then the shareholders will see greater returns.
A buyout can be a job saver for a company that is running the risk of going out of business. Rather than a company shutting its doors and terminating the employment of every single employee, a buyout enables some of its management staff and employees to keep their jobs. This promotes employee loyalty and efficiency. Job retention is also healthy for the overall economy.
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