Leverage buyouts (LBO) - Leveraged buyouts
A leverage buyout (LBO) is an investment structure designed by an investor or group of investors where the main objective is to take a public company to become private by buying all the outstanding shares using a large amount of borrowed capital (up to a 90% of the total amount can be in the form of debt).
LBOs are typically financed by using company assets and future cash flows to secure debt financing (bonds and / or bank loans). LBOs, like other forms of investment in private equity, have a clearly defined time horizon, since by the nature of the investment they are long-term due to lack of liquidity.
When the investor or group of investors are the current management team of the company, the transaction is known as a management buyout (MBO). After an LBO, after changes in control of the company, public shares are eliminated.
Objectives of LBO operations
When a company has had problems for a long period of time, a private equity company may believe that that company has potential, so it performs an LBO operation, acquiring it.
As a result, you will pay a lower price to buy the company and bring its hidden potential to light. The actions that are taken after the operation follow the following script:
- Expand the balance sheet of the company, by using more debt.
- Actively manage the company.
- Reorganization of the management team, with new professionals at the helm of the company.
- The use of higher debt is also frequent, to benefit from tax advantages.
- Reorient the business plan of the company towards the creation of value.
- Align the interests of shareholders and managers (see the problem between shareholders and managers).