Buyout

The process of purchasing shares in another firm in order to gain a controlling interest.

A buyout may be done for several reasons:

1)The acquirer has extra cash and is looking for investment

2) The acquirer believes the target firm to be undervalued

3)The acquirer wishes to expand into a new industry and wants to use the target firm as a springing board

4)The acquirer wishes to increase earnings per share
Since acquired firms’ earnings are consolidated into the balance sheet of the acquirer, this may be a way for some companies to increase their earnings without organic growth(i.e. growth within the company’s former business).

Firms that made acquiring firms their business were in vogue in the 1960s and were known as conglomerates. However, eventually the bubble burst and people started viewing aggressive expansions into irrelevant industries by CEOs to be impertinent.  Peter Lynch dubbed it “diworsification”. However, a buyout of a firm that has strategic relations(in the same industry, provides an important part etc etc) with the acquirer may be a good strategy.

Also see “leveraged buyout”

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