Leveraged Buy-OutKnowledge Center |
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Welcome to the Leveraged Buy-Out center of 12manage.
Here we exchange knowledge and experiences in the field of Leveraged Buy-Out.
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What is a Leveraged Buy-Out?A Leveraged Buy-out is an M&A and/or Corporate Finance method under which a company
is acquired by a person or entity using the value of the company's assets
to finance its acquisition. This allows the acquirer to minimize its outlay
of cash in making the purchase. In other words a LBO is a method to acquire
a company, by which a business can seek to takeover another company or at
least gain a controlling interest in that company. Special for a Leveraged
Buy-out is, that the corporation that is buying the other business borrows
a significant amount of money to pay for (the majority of) the purchase price.
Usually over 70% or more of the total purchase price. History of Leveraged Buy-OutLBOs became very popular in the 1980s, as public debt markets grew rapidly and opened up to borrowers that would not previously have been able to raise loans worth millions of dollars to pursue what was often an unwilling target. LBO activity accelerated, starting from a basis of four deals, with an aggregate value of $1.7 billion in 1980. LBO activity reached its peak in 1988, when 410 buyouts were completed with an aggregate value of $188 billion. The persons or company performing such a "takeover" often used very little of its own money and borrowed the rest, often by issuing extremely risky, but high interest "junk bonds". These junk bonds, since they were high-risk, paid a high interest rate, because little or nothing backed them up. No surprise some of these LBOs in the 1980s ended disastrous, with the borrowers going bankrupt. Benefits of Leveraged Buy-OutTypical advantages of the LBO method include:
Limitations of the Leveraged Buy-Out. DisadvantagesCritics of the Leveraged Buy-out mechanism indicated that bidding firms successfully squeezed additional cash flow out of the target's operations by expropriating the wealth from third parties. For example the federal government. Acquired companies pay less taxes because interest payments on debt are tax-deductible while dividend payments to shareholders are not. Furthermore, the obvious risk associated with a Leveraged Buy-out is that of financial distress, and unforeseen events such as recession, litigation, or changes in the regulatory environment. These can cause: difficulties in paying scheduled interest payments, technical default (the violation of the terms of a debt covenant) or outright liquidation. Weak management at the target company, or misalignment of incentives between management and shareholders, can also pose threats to the ultimate success of an Leveraged Buy-out.
Compare with: Management Buy-out | Acquisition Integration Approaches | Core Competence | Outsourcing | Parenting Advantage | Growth Phases | Horizontal Integration | Turnaround Management Return to Management Hub: Finance & Investing | Leadership | Strategy & Innovation |
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