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 ?
The leveraged buy-out that saw the Glazer family taKe over Manchester United has left the club with debts of pounds 514m and fans staging angry protests.
Corporate entrepreneurship and financial performance: The case of management leveraged buy-outs. Journal of Business Venturing, 10, 225-247.
In the corporate world, mergers and leveraged buy-outs have everyone looking over their shoulders.
Milken had nothing to do with merger and acquisition transactions or leveraged buy-outs. Such activities were handled (as is the case in all investment banking firms) by the corporate finance and capital market departments of the firm.
According to Krugman, this need to restructure corporate capital created an opening for financial operators to engage in debt financed takeovers and leveraged buy-outs in order to enforce the needed "change in management behavior" (Ibid.).
has been sentenced to bear a heavy burden: huge debt from two heavily leveraged buy-outs in 1986 and 1988.
The end of the 1980s was marked by the twin fiascos of bad junk bonds and leveraged buy-outs gone sour.
Attorneys involved with the bankruptcy say the examiner's recommendation could have wide-ranging implications for many other leveraged buy-outs, by undercutting or reinforcing their legality.
The fact is that most leveraged buy-outs are based on assumptions that never take retrenchment into account.
It might be hard to top the 80s with its friendly and hostile takeovers, leveraged buy-outs and aggressive maneuvers by foreign rubber firms in the North American market.
Billions are available for leveraged buy-outs that profit investment bankers, lawyers and corporate insiders.
The same can be said for the issues encountered in accounting for foreign taxes, leases, and leveraged buy-outs. Finally, implementation of the standard would have been simpler if management had been given the responsibility to account for the expected results of tax planning rather than being required to follow a set of artificial and rigid rules.