leveraged buyout
The acquisition of a company using a significant amount of borrowed money, with the target company's assets and cash flows used as collateral for the debt.
Example
“The private equity firm completed a leveraged buyout, using 70% debt and 30% equity to acquire the $1 billion company.”
Memory Tip
LBO = buy a company mostly with debt. Use the company's own cash flow to pay off the debt.
Why It Matters
Understanding leveraged buyouts helps you recognize how companies can change ownership and structure through debt financing. This matters because it affects employees through potential job changes, investors through altered company strategies, and consumers through potential service or product modifications when a company undergoes such a transaction.
Common Misconception
Many people believe that leveraged buyouts always harm the target company or its employees. In reality, a well-executed leveraged buyout can improve operational efficiency and company performance, though poorly structured ones may lead to excessive debt burdens or job losses.
In Practice
In 2007, Apollo Global Management and Texas Pacific Land Trust acquired a company using 80 percent borrowed funds and 20 percent equity, totaling 500 million dollars in debt. The acquired company generated 75 million dollars in annual cash flow, which was used to service the debt payments while hopefully allowing for business growth and eventual repayment of the borrowed amount.
Etymology
LEVERAGED (using debt/borrowing) BUYOUT (purchasing controlling interest). Using LEVERAGE (debt) to BUY OUT a company.
Common Misspellings
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