Leveraged Buyout - LBO

The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

In an LBO, there is usually a ratio of 90% debt to 10% equity. Because of this high debt/equity ratio, the bonds usually are not investment grade and are referred to as junk bonds. Leveraged buyouts have had a notorious history, especially in the 1980s when several prominent buyouts led to the eventual bankruptcy of the acquired companies. This was mainly due to the fact that the leverage ratio was nearly 100% and the interest payments were so large that the company's operating cash flows were unable to meet the obligation.

One of the largest LBOs on record was the acquisition of HCA Inc. in 2006 by Kohlberg Kravis Roberts & Co. (KKR), Bain & Co., and Merrill Lynch. The three companies paid around $33 billion for the acquisition.

It can be considered ironic that a company's success (in the form of assets on the balance sheet) can be used against it as collateral by a hostile company that acquires it. For this reason, some regard LBOs as an especially ruthless, predatory tactic.

Investment dictionary. . 2012.

Look at other dictionaries:

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  • leveraged buyout — n. Business the acquisition of a corporation by a group of investors using mostly borrowed funds which are secured by the assets of the corporation being acquired …   English World dictionary

  • leveraged buyout — noun a buyout using borrowed money; the target company s assets are usually security for the loan a leveraged buyout by upper management can be used to combat hostile takeover bids • Hypernyms: ↑buyout • Hyponyms: ↑bust up takeover * * * noun, pl …   Useful english dictionary

  • leveraged buyout — UK [ˌliːvərɪdʒd ˈbaɪaʊt] / US [ˌlev(ə)rɪdʒd ˈbaɪaʊt] noun [countable] Word forms leveraged buyout : singular leveraged buyout plural leveraged buyouts business a way of taking control of a company by buying its shares using borrowed money, with… …   English dictionary

  • leveraged buyout — buyout of one company by another (usually with borrowed funds) …   English contemporary dictionary

  • leveraged buyout — Method of purchasing outstanding stock of publicly held corporation by management or outside investors, with financing consisting primarily of funds borrowed from investment bankers or brokers. The initial and subsequent long term capital used… …   Black's law dictionary

  • leveraged buyout — noun the purchase of a controlling share in a company by its management using outside capital …   English new terms dictionary

  • leveraged buyout —    The purchase of a large company by a smaller one, using funds that have been borrowed with the assets of the company being bought as security …   Business law dictionary

  • reverse leveraged buyout — when a company that was a leveraged buyout restructures its (usually unmanageable) debt by issuing new equity (usually in exchange for some or all of the outstanding debt incurred during the original leveraged buyout) (Glossary of Common… …   Glossary of Bankruptcy

  • reverse leveraged buyout — Bringing back into publicly traded status a company that had been privatized by way of a leveraged buyout. Bloomberg Financial Dictionary …   Financial and business terms

  • Buyout — Purchase of a controlling interest (or percent of shares) of a company s stock. A leveraged buy out is done with borrowed money. The New York Times Financial Glossary * * * buyout buy‧out [ˈbaɪaʊt] also buy out noun [countable] FINANCE 1. when a… …   Financial and business terms

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