Mergers, Acquisitions, and Corporate Restructurings, 7th Edition

CHAPTER EIGHTLeveraged Buyouts

LEVERAGED BUYOUT (LBO) is a financing technique used by a variety of entities, including the management of a corporation or outside groups, such as other corporations, partnerships, individuals, or investment groups. Specifically, it is the use of debt to purchase the stock of a corporation, and it frequently involves taking a public company private. Its popularity is affected by factors such as the level of interest rates and the availability of debt financing. The low interest rates that prevailed during the years 2004–2007 helped explain why so many large LBOs occurred in that period. The lack of debt financing in the years of 2008–2009, at a time when interest rates were low, helps explain the big falloff in the number of deals in those years. In the economic recovery that occurred during 2010–2017, debt financing became increasingly available due to the large amounts of liquidity provided by expansionary monetary policy, but lenders were cautious and would not fund all of the types of deals that they did before the subprime crisis.

TERMINOLOGY

There is much overlap in LBOs and going-private transactions. A going-private deal is where a public company is taken private. Sometimes this is referred to as a public-to-private transaction (PTP). Such a transaction is financed with some debt and some equity. It should also be kept in mind that a debt-financed buyout can be done of a non-listed, that is, non-public, firm. When the bulk of the ...