Leveraged buyout

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Leveraged buyout (LBO)

A transaction used to take a public corporation private that is financed through debt such as bank loans and bonds. Because of the large amount of debt relative to equity in the new corporation, the bonds are typically rated below investment-grade, properly referred to as high-yield bonds or junk bonds. Investors can participate in an LBO through either the purchase of the debt (i.e., purchase of the bonds or participation in the bank loan) or the purchase of equity through an LBO fund that specializes in such investments.

Leveraged Buyout

The acquisition of a publicly-traded company, often by a group of private investors, that is financed with debt. Often, the acquirer in a LBO issues junk bonds in order to raise the capital necessary for the acquisition. A leveraged buyout allows a company to be taken over with little capital, but it can be a high risk endeavor.

leveraged buyout (LBO)

The use of a target company's asset value to finance most or all of the debt incurred in acquiring the company. This strategy enables a takeover using little capital; however, it can result in considerably more risk to owners and creditors. See also hostile leveraged buyout, reverse leveraged buyout.
Case Study Leveraged buyouts (LBOs) became popular in the 1980s when firms such as Beatrice Companies, Swift, ARA Services, Levi Strauss, Jack Eckerd, and Denny's were acquired and then were taken private. With an LBO, a firm's management often borrows funds using the firm's assets as collateral. The borrowed money is used to purchase all the firm's outstanding stock. As a result, a small group of individuals is able to take control of the firm without using any or much of the group members' own money. Following the buyout the new owners frequently attempt to cut costs and sell assets in order to make the increased debt more manageable. Because the group initiating the LBO must pay a premium for the stock over the market price, an LBO nearly always benefits the stockholders of the firm to be acquired. However, investors holding bonds of the acquired company are likely to see their relative position deteriorate because of the increased debt taken on by the company. For example, the leveraged buyout of R. H. Macy & Co. produced a $16 jump in the price of its common stock at the same time the price of its debt securities fell. Most bondholders have no recourse to the increased risks they face because of the greater resultant debt.

Leveraged buyout.

leveraged buyout (LBO) occurs when a group of investors using primarily borrowed money, often raised with high yield bonds or other types of debt, takes control of a company by acquiring a majority interest in its outstanding stock.

Leveraged buyouts, which are often, but not always, hostile takeovers, may be engineered by an outside corporation, a private equity firm, or an internal management team.

References in periodicals archive ?
Such leveraged takeovers were among the issues criticised by the Department of Culture, Media and Sport select committee, when it released the findings of an exhaustive analysis of the English game last week that called for reform at the Football Association and stricter regulations on club ownership.
Borse Dubai, which has controlling stakes in local bourses Dubai Financial Market and Nasdaq Dubai, in December sold about half of its stake in exchange operator Nasdaq OMX for $672 million as both sides slowly detach from an alliance forged in pre-crisis days of cheap borrowing and leveraged takeovers.
UEFA's report, the European Club Footballing Landscape, accepts much of the debt is linked to the leveraged takeovers by the Glazer family at Manchester United and the Hicks/Gillett buy-out of Liverpool.
The authors point to several factors for this decline, including the decreased willingness of lenders to finance highly leveraged takeovers, an improved and more predictable set of defensive measures that have reduced the strategic advantage of the hostile bid, and increased use of the acquirer s own shares as an acquisition currency, which is difficult to use in a hostile transaction.
It appears what is really motivating this cost cutting is the debt service burden taken on in the corporate leveraged takeovers in the 1980s,'' Hernandez charged.