Leveraged Buyout (LBO) - Explained
What is a Leveraged Buyout?
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Table of ContentsWhat is a Leveraged Buyout?Advantages of an LBODisadvantages of an LBOAcademic Research on Leveraged Buyout
What is a Leveraged Buyout?
Leverage buyout refers to the avenue used to purchase another firm by using funds gotten from outside such as loans and bonds instead of utilizing the earnings derived from the company. In some cases, the assets of the company being purchased serve as the security for the loans including those assets belonging to the firm doing the buying. This is usually achieved when a company is purchased by a collection of investors that engage in huge borrowing needed to facilitate the buying deal.
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Advantages of an LBO
Regardless of the risks linked to LBOs, they also have the following benefits:
- More control-After the acquisition deal has moved from public ownership to private, the current owners are free to change such things like the cost structure and the operations of the firm. This will make it possible for that venture to go through.
- Financial upside- Because LBOs entails the buying companies using very little of their capital, investors will be happy as far as the firm being acquired is in a position to produce enough money that can facilitate the buying deal.
- Continued operation- At some point, the firm may face the risk of being closed down because as a result of the poor financial situation. Because of this, when a party shows up as interested in the purchase, such a company may be open to such an acquisition deal.
Disadvantages of an LBO
Despite the advantages of LBOs, it has some of the following disadvantages:
- Poor morale-This may happen in instances where the firm engages in hostile buyouts where the firm has no interest in being bought. This may happen in cases of sabotage by unhappy employees that may stop or slow down the work which in return will prevent the company from achieving success.
- Bankruptcy a big risk-If the funds from the company being acquired is not in a position to take care of the loan amounts needed to purchase it, there is a possibility that the firm may end up being declared bankrupt as a result of the weak financial situation which is a risk itself.
- Deeper cuts-In an attempt to make the acquired company achieve profitability, the new management may engage in some measures such as cutting the operational cost. This may entail retrenchment of some employees leading to job losses, something which can have a negative influence on the society hence giving the firm a negative perception.
These days LBOs are not as common as they used to be at some point due to the fact that it has not been easy to get financing. This has been attributed to the tough and strict bank regulations that came into existence after the wild 1980s.
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