Chapter 17 - Private Equity Leveraged Buyouts (LBOs)...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
FINA 4082 - Marquette University Dr. David Krause Private Equity – Leveraged Buyouts (LBOs) Chapter 17
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
FINA 4082 - Marquette University Dr. David Krause Introduction to Traditional & Alternative Investments Investment Alternatives Traditional Alternatives Modern Alternatives Traditional Investments Private Equity LBOs Commodities Real Estate Hedge Funds Managed Futures Credit Derivatives ETFs Stocks Bonds
Background image of page 2
FINA 4082 - Marquette University Dr. David Krause Leveraged Buyout (LBO) An LBO is also known as a highly-leveraged transaction. It occurs when an investor gains control of a majority of a target company's equity through the use of borrowed money or debt. An LBO strategy involves 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.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
FINA 4082 - Marquette University Dr. David Krause Leveraged Buyout (LBO) 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 70% debt to 30% equity (2.5X), although debt can reach as high as 90% to 95% (10-20X) of the target company's total capitalization. The equity component of the purchase price is typically provided by a pool of private equity capital. Typically, the loan capital is borrowed through a combination of prepayable bank facilities and/or public or privately placed bonds, which may be classified as high- yield debt, also called junk bonds. Often, the debt will appear on the acquired company's balance sheet and the acquired company's free cash flow will be used to repay the debt.
Background image of page 4
FINA 4082 - Marquette University Dr. David Krause Leveraged Buyouts The difference between leveraged buyouts and ordinary acquisitions: 1. A large fraction of the purchase price is debt financed. 2. The LBO goes private and its shares are no longer traded on the open market.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
FINA 4082 - Marquette University Dr. David Krause Leveraged Buyouts The three main characteristics of LBOs: 1. High debt 2. Financial incentives 3. Private ownership
Background image of page 6
Dr. David Krause Restructuring: Leveraged Buyouts (LBOs) A restructuring strategy whereby a party buys all of a firm’s assets in order to take the firm private. Significant amounts of debt may be incurred to finance the buyout. Immediate sale of non-core assets to pare down debt. Can correct for managerial mistakes Managers making decisions that serve their own interests rather than those of shareholders (agency problems). Can facilitate entrepreneurial efforts and strategic
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/19/2011 for the course ACCT 440 taught by Professor Smith during the Spring '11 term at Saginaw Valley.

Page1 / 29

Chapter 17 - Private Equity Leveraged Buyouts (LBOs)...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online