Wednesday, May 13, 2009

Today's Fly Or Die Commerce Report: Leveraged Buyouts Defined

According to Wikipedia: "A leveraged buyout (or LBO, or highly-leveraged transaction (HLT), or "bootstrap" transaction) occurs when a financial sponsor acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage (borrowing). The assets of the acquired company are used as collateral for the borrowed capital, sometimes with assets of the acquiring company. The bonds or other paper issued for leveraged buyouts are commonly considered not to be investment grade because of the significant risks involved."

According to the Stock Jargon website: "Leveraged buyouts are essentially takeovers that involve using lots of borrowed money. 

These were made famous in the 1980's when corporate raiders would issue junk bonds, buy a conglomerate that was mismanaged, and sell of its parts. LBO's can make money in two ways:

(1) Buy the company and sell off its pieces, then repay the debts. If the value of the pieces is greater than the business as a whole, the buyer makes a profit.

(2) Buy the company and manage it more efficiently. As long as the company can be managed so that it generates enough cash flow to pay the interest on bonds, the buyer will profit."

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