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:

  1. Expand the balance sheet of the company, by using more debt.
  2. Actively manage the company.
  3. Reorganization of the management team, with new professionals at the helm of the company.
  4. The use of higher debt is also frequent, to benefit from tax advantages.
  5. Reorient the business plan of the company towards the creation of value.
  6. Align the interests of shareholders and managers (see the problem between shareholders and managers).

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