Eli5:How is taking a company private through a lbo different from the company buying back its shares? PS: I’m just a beginner in the finance field, just wanna know the difference!
In: Economics
A leveraged buyout = an investor (like a private company) taking on a lot of debt in order to buy out another company that is publicly traded, and then delisting it so it is no longer a publicly traded company. That basically means that the ownership of the company completely changes hands, and it is no longer responsible to public shareholders.
When a company *buys back* shares, it is just making its own control over itself stronger and less vulnerable to mass buyouts by others. It does not change ownership.
It is a matter of completeness. Any time a public company is taken private, ALL outstanding shares owned by the public must be acquired. The procedure is complex but it must be done, generally, by public announcement and every public owner of the share must be paid if the acquisition is approved and goes ahead.
A share buy back can only be done by the company issuing the shares. It only involves a limited number of shares which is acquired in the open market (normally). Share buy backs need to be approved by the Board of Directors. (ie the representative of shareholders). It isn’t something the managers of the company can do without authorization.
This is a pretty superficial (technical) explanation. The reasoning and motivation behind either of these actions are varied.
The big difference is who buys the stock. In an LBO it is one company buying another company, taking up huge loans in order to do so. However in a stock buyback it is the company itself which buys its own stock. This is done as a service to its shareholders to drive the price up. The remaining shareholders will then sit on a bigger portion of the ownership.
And LBO is a means of financing the buying back all the shares. It means that whoever it taking the company private is taking on debt (ie. borrowing money) to fund the share purchase. And LBO is typically initiated by an outside investor like a hedge fund or private equity firm rather than the company itself.
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