What is a Bust-Up Takeover?

A bust-up takeover refers to a corporate buyout, where a target company sells its portion of activities or assets so that it can pay some of its debt that financed the initial takeover. The acquirer borrows money to purchase a company and then repays the debt using the business target assets once it takes control. This strategy is commonly used where the target firm has undervalued assets that the acquirer is interested in exploiting.

How are Bust-Up Takeovers Used? 

In this style of a leveraged buyout, there is the borrowing of money to meet acquisition costs. The acquirer is expected to conduct an adequate in-depth analysis first before engaging in the purchase. It is important to do the assets valuation of the target company. It will help the acquirer to know whether the assets returns are capable of paying for the additional debt cost. Note that if the target companys undervalued assets are significant and the acquirers cash is little, it may need debt to facilitate the purchase. It means that the bust-up takeover will be key in unlocking the value.

How Bust -UP Takeover Works

Lets assume that we have companies A, B, and C. A that is controlled by B is smaller than C. Company A, however, is interested in acquiring C using debt. It, therefore, plans to sell a portion of Company C, and also make use of junk bonds for financing, once it finalizes the acquisition. A is finally able to purchase C. After gaining its control, it sells part of company Cs assets, to settle the debt, it used to finance its acquisition.