Buyout

A buyout happens when a person or company gets hold of enough shares in another company to control it outright, rather than just owning a small slice of it. In plain terms, one party buys the whole business, or at least enough of it to call the shots, instead of just trading its stock on the open market like everyone else.

There are a few common flavors. In a management buyout, the company's own executives pool money (often borrowed) to purchase the firm from its current owners. In a leveraged buyout, the buyer funds most of the purchase price with debt, using the target company's own assets or future cash flow as collateral, so the buyer puts up relatively little of its own cash. Buyouts are frequently the mechanism by which a publicly traded company goes private, meaning its shares stop trading on an exchange entirely.

The nuance that trips people up is the difference between a buyout and an ordinary acquisition announcement or a tender offer. Not every merger is a buyout; the word specifically implies a change in control, usually a majority or supermajority stake, not just a strategic partnership or minority investment. Also, when news of a buyout breaks, the target company's stock price typically jumps toward the announced offer price, but it rarely trades exactly at that price until the deal actually closes, because there's still a chance regulators or shareholders block it.

For a trader watching a chart, a buyout announcement often shows up as a sudden gap up (or down, if the offer disappoints) followed by the stock trading in a tight range near the offer price, since the outcome is now mostly binary: the deal closes near that price, or it falls apart and the stock reprices back toward where it was.