Business, Legal & Accounting Glossary
Leveraged buyout (LBO) is a corporate financing method. It is another name for cash flow lending. It refers to the acquisition of a company via a substantial amount of debt (borrowed capital) raised through bonds or loans. Assets of the company being acquired and also that of acquiring one is often pledged as collateral for loans taken. Leveraged buyout enables companies to go in for massive acquisitions without any mammoth capital commitment. Market analysts add that in LBOs normally for 10% equity a 90% debt ratio is present. These bonds are known as junk bonds. They are not of an investment-grade due to an extremely high debt/equity ratio. LBOs are often labelled as predatory tactics in corporate circles. It is also alternatively known as a hostile takeover, bootstrap transaction and highly leveraged transaction. Once a company is acquired through leveraged buyout it is often turned into a private company. This gives acquiring company a greater degree of control over the acquired one. Leveraged buyout concept crystallized in the latter half of the 1960s. Leveraged buyout enjoyed much popularity in the 1980s. Leveraged buyout financing has made a comeback in the post-dot-com collapse era, albeit in a revised format.
When companies go in for leveraged buyout financing they prepare themselves for a host of situations. They need to hire competent managerial personnel where needed, organize a proper business plan, negotiate long run use and supply agreements, structure fresh employee benefit plans and initiate effective communication with employees to name a few.
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This glossary post was last updated: 28th March, 2020 | 0 Views.