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.

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