Professional Documents
Culture Documents
LBO
LBO
restructuring
Other forms:
Acquisitions,
Divestitures LBO,
mergers
Privatization
2
The acquisition of another company using a significant amount of
borrowed money (bonds or loans) to meet the cost of acquisition.
Often, the assets of the company being acquired are used as
collateral for the loans or bonds in addition to the assets of the
acquiring company. The purpose of leveraged buyouts is to allow
companies to make large acquisitions without having to commit a
lot of capital.
Corporate
Finance
LBO
Debt
Leveraged Buyout activity
Management buyouts (MBOs)
LBO transaction may be reversed with future public offering
Buyout group seeks to harvest gain within three- to five-year
period
Aim to increase profitability of company and thereby increase
market value of firm
Buyout group may include incumbent management and may be
associated with :
Buyout specialists, e.g., Kohlberg Kravis Roberts & Co.
Investment bankers
Commercial bankers
The 1980s
The 1990s
The Post 1990s
Characteristics
◦ Debt financing
Highly leveraged — up to 90% of purchase price
Debt secured by assets of acquired firm or based on
expected future cash flows
Paid off either from sale of assets or from future cash
flows generated by operations
◦ Acquired company became privately held
◦ Firm expected to go public again after three to five
years
General economic and financial factors
◦ Sometimes LBOs and MBOs were responses to
threat of unwanted takeovers
◦ Sustained economic growth between 1982-1990
◦ Earlier inflation
◦ Financing innovations — high-yield bonds (junk
bonds) made public financing available to
companies below investment grade
◦ Legislative factors, especially taxes
◦ Change in antitrust climate - beginning in 1980
Junk bonds are non-rated debt.
◦ Bond quality varies widely
◦ Interest rates usually 3-5 percentage points above the
prime rate
Bridge or interim financing was obtained in LBO transactions
to close the transaction quickly because of the extended
period of time required to issue “junk” bonds.
◦ These high yielding bonds represented permanent
financing for the LBO
Junk bond financing for LBOs dried up due to the following:
◦ A series of defaults of over-leveraged firms in the late
1980s
◦ Insider trading and fraud at such companies a Drexel
Burnham, the primary market maker for junk bonds
Junk bond financing is highly cyclical, tapering off as the
economy goes into recession and fears of increasing default
rates escalate
Tax benefits — can enhance already viable
transaction
Management incentives and agency cost effects
Wealth transfer effects
Asymmetric information and underpricing
Other efficiency considerations
Background
◦ 1992-2000: Sustained economic growth —
resurgence of LBOs
◦ Size of aggregate LBO transactions moved to $62.0
billion in 1999 — almost as high as the peak of
$65.7 billion in 1989
Resurgence of LBOs
◦ Favorable economic environment
◦ Change in LBO financial structure
◦ Restructuring of intermediaries
◦ Innovative approaches developed by investment
banking-sponsoring firms