Today, many countries all over the world are coming to terms with the economic recession which affected deeply the market and business in general. Companies, -big and small- were adversely affected and some even closed down. As a result of that, companies hare resort to other means of salvaging their business such as buyouts. Notably, buyout is a form of financing whereby a group of investors or individuals buy a controlling ownership of a company from original owners (Tucker, 2008, p.79).
Irrespective of the fact that buyout is one of the approaches which have been implemented in the past to rescue different companies from collapsing; this approach has different effect on market shares. In consistent with this, buyouts have been found to assist companies to maintain their market share. Notably, bank and auto buyouts increased the investor confidence that their investment were safe which resulted in the maintenance of the share price. On the contrary, whereas buyouts plays a critical role in maintaining the market share, it was found that there were increased chances the market share would increase substantially since the company or organization which was involved in the buyout would be committed to ensuring that the particular buyout was successful. This therefore required the company to increase efficiency to attain this. As a result, a high preserved market was attained. There are also different costs which are associated with buyouts. In line with this, some of these costs include the transactions costs which must be met by the company which is taking over.
Private Equity investors in most countries are facing challenges arising from the regulators way of taxation. It has been found that some countries have unfavorable legislation on ‘taxation of private equity companies’ which shy away private equity investors (Wright and Bruining, 2008, p.31). Over the years, Germany has been rated as one of the top countries in Europe with unfavorable tax legislation. In respect to that, investors have not been willing to invest in their country; in fact Wright and Bruining (2008) noted that, in the year 2000 investors who wanted to invest in foreign investment funds shied away and invested in Switzerland; “where tax treatments were well established and understood” (p.32). However, Germany is currently in the course of reforming their legislation which may in future win investors confidence (p.6).
More often, employees are not fairly given opportunity to participate in the transfer of ownership of their company to new owners. Shareholders and executives can use the transfer of ownership to benefit at the expense of employees (McFall and Walker, 2007). They explain that, the takeover plan is occasionally done without the knowledge of employees and therefore they learn of the takeover through the media. Besides, their wages is sometimes lowered down and in extreme cases they are laid off. Such kind of behavior truly violates their rights as employees.
During buyout transition, management system is invariably changed and new managers are installed; this open ways for new innovative ideas that completely revolutionizes the company (Wright and Bruining, 2008). Many companies have shown tremendous improvement after buyout and this implies that the shareholder benefits in terms of the dividends that accrue. Additionally, the company which is involved in the buyout would absorb losses by reaping profits which are made during the buyout period. However, some people view that the private equity companies do not target long-term profits and hence abandoning the long-term goals of the company they takeover (Wright and Bruining, 2008, p.68). In a situation where companies are merging, it totally changes the management structure of the company and also brings in monopoly into the market which is not good as far as competition is concerned.
In conclusion, the buyout plans has its positive and negative impacts to the economy, shareholders, customers and employees. Some investors aim only at short-term plans of maximizing profits and therefore abandoning the company’s long-term goals; which is a negative impact to the shareholders. However, there is also the positive side of the new management which comes with different ways of running the company and basically improving on the performance of the company.
McFall, J., & Walker, D. (2007). Private Equity: oral and written evidence. Duke Street,
Norwich: The Stationery Office.
Tucker, I.B. (2008). Survey of Economics. Mason, OH: South-Western Cengage Learning.
Wright, M., & Bruining, H. (2008). Private Equity and Management Buy-outs. 5 Lansdown Road Cheltenham: Edward Elgar Publishing.