Leveraged Buyouts (LBO)

A leveraged Buyout is the acquisition of a company, whereby the acquisition amount is primarily funded by credit. In a typical Leveraged Buyout situation the acquiring company borrows up to 90% of the transaction cost but the liability is tied to the acquired company. The acquired company is then reorganized in order to increase free cash flows in order to repay debt.

Take Private Acquisitions

In a Take Private Acquisition, the buyout party makes a takeover offer for a publicly listed company. If accepted, the acquired entity is then delisted from the exchange, becoming a private company.

Private Equity Firms

Leveraged Buyouts gained popularity in the 1980s when American investment banks became active in the space. Later, specialized LBO firms drove the ever increasing growth of the industry.

Companies such as KKR, Blackstone and Wasserstein, Pernella. The LBO companies were fueled by the investment bank Drexel Burnham & Lambert, which was by far the largest originator of Junk Bonds. These high yield bonds provided much of the leverage needed for the buyouts.

Barbarians at the Gates

The height of the initial LBO boom was epitomized in KKRs bidding war against a rival management-led buyout offer of RJR Nabisco. The $31 billion takeover was at the time by far the largest LBO in history. A record the deal held for the next seventeen years.

At the time, the LBO firms along with individual corporate raiders, such as Carl Ichan and Nelson Peltz, where highly criticized. Over the years, the LBO firms have gone through somewhat of a rebranding, and have come to be known as Private Equity Firms.

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