Funding Post elucidates that a leveraged buyout is a business deal whereby one firm or company acquires another, by buying out a substantial portion of its equity by means of borrowed money. A leveraged buyout is also known as a bootstrap or highly leveraged transaction. The ratio of debt to equity is slanted very heavily towards the former in this type of deal. Every so often, the assets of the target company are used as security for the loan that needs to be taken so as to pay for the takeover.
The loan in a leveraged buyout could be taken from a bankrolling institution, or more frequently, raised from the public, by moving high yield bonds also recognized as junk bonds. The target company might be made private once the acquisition is complete, giving the new owners greater control. That is when they move into the kill, streamlining the company, plainly taking it to pieces and selling parts of it to other purchasers for huge profits.
Shareholders in a leveraged buyout have numerous options, together with buying equity through a specialized leveraged buyout fund or purchasing the bonds as mentioned above. Although the large debt component intensifies risk to investors, it also holds the assurance of momentous returns at the time of withdrawing the investment. The CEO of Sun Capital Partners, Inc., Marc Leder has been involved in leveraged buyouts for more than 25years.
For over 40 years, the leveraged buyout concept has been around. Before really coming into its own in the 1980s, it spent a couple of quiet decades. The approach came in for a lot of disapproval, as it was perceived to have a very disruptive effect and destroy value. Unsurprisingly, it attracted the attention of the regulatory authorities as well as the media, and also forced defenseless companies to reinforce themselves against the probability of a hostile takeover. The ‘poison pill’ or a scheme whereby target companies self-destruct in the occasion of a takeover was an unswerving reaction to the leveraged buyout.
In the 1980s, the spectacular rise of the leveraged buyout was short-lived, paradoxically undone by its own success. Everybody wanted a share of the junk bond pie, and so much money was poured in that it pushed prices up and reformed the financing structure and buyout pricing altogether. The leveraged buyout was publicly dead in the early 1990s when the stock markets were thriving, but seems to be resuscitating itself in a different form since the dotcom bust when rationality returned to estimations.
Authorities like Marc Leder believes that the LBO will make a comeback, as buyout companies are now faced with striking options of taking over monetarily distressed companies, which have accurate expectations of valuation. Nevertheless, they may not bring in the mind distressing returns of the glory days. A different stratagem of deal making is in the offing. Leveraged buyout firms are more likely to target newer firms, with a technology intensity and entrepreneurial bent, as disparate to large companies in mature industries.
The emphasis is also likely to move away from pure fiscal expertise to operational acumen. Acquirer companies are starting to take a more active interest in the set-ups of the target company. And lastly, the center of the world is shifting! More and more deals are happening all over the world, as the industry turns global.