LEVERAGED BUYOUT By: Asha

MEANING
Acquiistion

of target company with a substantial portion of borrowed funds. Leverage: significant use of debt for financing the transaction. Buyout: gain of control majority of the target company equity. It is also known as private equity. Technique of corporate restructuring. Average life of 3-7 years. In an LBO, there is usually a ratio of 90% debt to 10% equity.

HISTORY
Leveraged

buyouts were a relatively obscure means of financing large corporate acquisitions in the post WW II period. The practice positively boomed in the 1980s, with an combined $188 billion in acquisitions taking place in 1988 alone. The term "hostile takeover," coined during this period, reflects the mixed feelings towards leveraged buyouts. Other common synonyms are "highly-leveraged transaction" and "bootstrap transaction."

FEATURES
Aside

from debt financing, one of the principal features of the LBO is the ability to unlock value in an undervalued company. The corporate raiders of the 1980s were famous, if not notorious, for purchasing large conglomerates and breaking them up into pieces. In a successful deal, the total value of the individual pieces would be more than the purchase price of the conglomerate. Even restructuring a company without spinning off its assets could result in higher profit margins and increased overall value, all while increasing the overall efficiency of the company.

ADVANTAGES AND DISADVANTAGES

advantage
Flexible structure of financing Tax shield Descipline of debt helps lead to y Divesting non core business y Cost cutting Synergy and efficiency gain.

disadvantage

Large level of debtincreased risk Lay-offs increase Long term growth disrupted as company focuses on short term goal of reducing debt as the cost of R &D Dilution in equity and increase in no.of owners increses conflict in management