Leveraged Buyout

A leveraged buyout (LBO) is an acquisition (usually of a company but it can also be single assets like a real estate) where the purchase price is financed through a combination of equity and debt and in which the cash flows or assets of the target are used to secure and repay the debt. As the debt usually has a lower cost of capital than the equity, the returns on the equity increase with increasing debt. The debt thus effectively serves as a lever to increase returns which explain the origin of the term LBO.

LBOs are a very common occurrence in today's M&A environment. The term LBO is usually employed when a financial sponsor acquires a company. However, many corporate transactions are part-funded by bank debt, thus effectively also representing an LBO. LBOs can have many different forms such as Management Buy-out (MBO), Management Buy-in (MBI), secondary buyout and tertiary buyout among others and can occur in growth situations, restructuring situations and insolvencies just like in companies with stable performance. LBOs mostly occur in private companies, but can also be employed with public companies (in a so called PtP transaction, Public to Private).

As financial sponsors increase their returns by employing a very high leverage (i.e., a high ratio of debt to equity), they have an incentive to employ as much debt as possible to finance an acquisition. This has in many cases led to situations, in which companies were "overlevered", meaning that they did not generate sufficient cash flows to service their debt, which in turn led to insolvency or to debt-to-equity swaps in which the equity owners lose control over the business and the debt providers assume the equity.

Read more about Leveraged BuyoutCharacteristics, History, Management Buyouts, Secondary and Tertiary Buyouts, Failures, Popular References

Other articles related to "leveraged buyouts, leveraged buyout, buyout, leveraged":

... Roberts Co.) (NYSE KKR) is an American multinational private equity firm, specializing in leveraged buyouts, headquartered in New York ... $400 billion of private equity transactions and was a pioneer in the leveraged buyout industry ... worked together at Bear Stearns, where they completed some of the earliest leveraged buyout transactions ...
History Of Private Equity And Venture Capital - The First Private Equity Boom (1982–1993)
... the 1980s is perhaps more closely associated with the leveraged buyout than any decade before or since ... The decade would see one of the largest booms in private equity culminating in the 1989 leveraged buyout of RJR Nabisco, which would reign as the largest ...
Apollo Management - Portfolio Investments
... equity investor through the mid-2000s buyout boom ... Claire's 2007 In March 2007, Apollo announced the $3.1 billion leveraged buyout of costume jewelry retailer, Claire’s Stores ... The portfolio comprised primarily senior secured leveraged loans that had been made to finance leveraged buyout transactions at the peak of the market ...
Kinder Morgan - Leveraged Buyout
... On August 28, 2006 Kinder Morgan announced that it would be taken private in a management-led leveraged buyout totaling approximately $22 billion ... Morgan shareholders by persons involved with the buyout ...