Leveraged Buyout

Leveraged buyout is also known as LBO, bootstrap transaction or highly leveraged transaction (HLT). This happens when financial sponsors acquire the holding of most of the equity shares of a target organization with the implementation of debt or borrowed funds.

Leveraged buyout or LBO is a plan that includes the take-over of another organization utilizing a substantial amount of debt or borrowed funds (usually loans or bonds) for meeting the take-over cost. Frequently, the assets of the organization that is being taken over furthermore to the assets of the company, which is taking over the other company, are utilized as security or pledge for the debts.

The principal intention behind leveraged buyout is to permit different organizations to accomplish big take-overs without the necessity of investing a large amount of capital. In case of a leveraged buyout, most frequently the ratio remains 30% equity to 70% debt, however, the amount of debt may go up to the range of 90%-95% of the entire capitalization amount of the target organization. The equity element of the buying price is commonly rendered by a consortium of private equity capital.

Generally, the debt capital is taken by a collection of private or publicly placed bonds and/or prepayable banking services that can be categorized as junk bonds or high-yield debts. In many instances, it is seen that the loan is reflected on the balance sheet of the company, which has been taken over and its free cash flows are implemented for the repayment of the loan.

The important leveraged buyout transactions of the past include the following:

The purchase of Waterman Steamship Corporation by McLean Industries, Incorporated in the year 1955
The takeover of Orkin Exterminating Company in the year 1964
The hostile takeover of Sharon Steel Corporation by Victor Posner in the year 1969
There are basically two goals for loan financing in leveraged buyouts and they are the following:

1) The application of loan or debt leverages or enhances the financial earnings of the private equity sponsor. According to the Modigliani-Miller theorem, the entire earning received from an asset by its holders remains unchanged by its financing form. Here, every other element remains the same within the stringent limiting presumptions.

2) As per the Modigliani-Miller theorem on taxes, the tax shield of the take-over loan improves the firm value.

The leading leveraged buyout firms all over the world include the following:

Bain Capital
Apollo Management
The Carlyle Group
The Blackstone Group
Hellman & Friedman
Goldman Sachs Capital Partners (PIA)
Madison Dearborn
Kohlberg Kravis Roberts
Silver Lake Partners
Providence Equity Partners
TPG Capital, L.P.
Thomas H. Lee Partners
Warburg Pincus
In Europe, the leading leveraged buyout firms include the following:

Apax Partners
3i
Barclays Private Equity
AXA Private Equity
CVC Capital Partners
Cinven
Permira
Management buyout or MBO is a popular form of leveraged buyout.

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Last Updated on : 1st July 2013

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