What is the difference between a stock buyback and management buyout?

By Yolander Prinzel AAA
A:

Each share of stock sold in the market represents partial ownership in the issuing company. If an individual or entity buys enough of these shares, they can take what's called a controlling interest in the company. For example, if you own 1/10th of a percent of XYZ and thousands of other investors own their own small portions, none of you, on your own, can affect sweeping change within the company. But an individual who owns 51 percent would be considered to have a controlling interest and can, on his or her own, determine the way the company is run. A management buyout occurs when managers or other executives in a company purchase that controlling interest from other shareholders either to take control of the company or, in some cases, to take the company private.

In a stock buyback, the company itself repurchases issued shares of its own stock in order to reduce the number of outstanding shares. By reducing the number of outstanding shares, the company can create an increase in the market price of the stock. It can also protect itself from a hostile takeover, which occurs when an outside individual or entity buys a controlling interest against the company's wishes. Finally a stock buyback can increase the earnings per share as it's reducing the number of outstanding shares by which the net income is divided. Plans for gradual stock buybacks over a period of time are referred to as share repurchase plans. Occasionally, a stock buyback could occur because the company plans on going private meaning that it will no longer allow for public ownership of its shares.

RELATED FAQS

  1. What are the sources of funding available for companies?

    Despite all the differences among companies, there are only a few sources of funds available to all firms. 1. They make profit ...
  2. Can an employer adopt a different type of retirement plan for each employee?

    Generally, any qualified retirement plan or IRA-based plan adopted by an employer must cover all eligible employees. Failure ...
  3. I lost my share certificate. Do I still own the stock?

    Regardless of whether a shareholder loses his or her stock certificate, that person still owns the shares. However, in order ...
  4. What is an odd-lot buyback?

    An odd-lot buyback occurs when a company offers to purchase shares of its stock back from people who hold less than 100 shares. ...
RELATED TERMS
  1. LLC Operating Agreement

    An LLC Operating Agreement is a document that customizes the ...
  2. Succession Planning

    A strategy for passing each key leadership role within a company ...
  3. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  4. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  5. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  6. AG (Aktiengesellschaft)

    AG is an abbreviation of Aktiengesellschaft, which is a German ...
comments powered by Disqus
Related Articles
  1. The Defined-Contribution Plan: A Flawed ...
    Retirement

    The Defined-Contribution Plan: A Flawed ...

  2. 3 Reasons To Use An Employer-Sponsored ...
    Retirement

    3 Reasons To Use An Employer-Sponsored ...

  3. Some Good News Is Bad News For Investors
    Markets

    Some Good News Is Bad News For Investors

  4. Payroll Deductions Pay Off
    Retirement

    Payroll Deductions Pay Off

  5. Beware Of Company Stock In Qualified ...
    Investing Basics

    Beware Of Company Stock In Qualified ...

Trading Center