Leveraged Buyouts

Leveraged Buyouts - Leveraged Buyouts FIN 461 Professor...

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Leveraged Buyouts FIN 461 Professor Thomas Boulton Rosenbaum and Pearl, Chapters 4 & 5
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Leveraged Buyouts A leveraged buyout (LBO) is the acquisition of a target using debt to finance a large portion of the purchase price. Targets include both public and private companies, divisions, and their subsidiaries Historically, 60-70% debt and 30-40% equity Equity contribution comes from a financial sponsor Leverage is key to LBOs: Enables sponsor to contribute small equity investment Enables sponsor to achieve desired returns (20%+ annualized) Tax savings due to tax deductibility of interest payments
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LBO participants Key participants in an LBO include the following: Financial sponsors (PE firms, IB merchant banks, hedge funds, etc.) Investment banks Lenders (commercial banks and institutional lenders) Bond investors (high yield funds, hedge funds, pension funds, insurance companies, distressed debt funds, and CDOs) Target management
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LBO candidates Attractive LBO candidates are targets that can be purchased at a price and utilizing a financing structure that provides sufficient returns with a viable exit strategy (typically modeled as 5-7 year investments). Companies with the following characteristics generally represent attractive LBO candidates: Proven management team Strong and stable cash flows (allow us to service the debt) Leading and defensible market positions Growth opportunities Efficiency enhancement opportunities Low capital expenditure and research and development requirements Strong asset base (easier to borrow money against this)
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LBO economics During sponsor’s ownership of LBO target, cash flow is used primarily to service and repay debt.
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This note was uploaded on 12/21/2011 for the course FIN 461 taught by Professor Boulton during the Fall '11 term at Miami University.

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Leveraged Buyouts - Leveraged Buyouts FIN 461 Professor...

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