M&A Deals - Leveraged Buyouts

M&A deals can take many different forms; however, leveraged buyouts (also known as an LBO), especially now with easy credit and low interest rates, have been a good way to help buyers purchase companies. Of course, the endgame for any buyer of a company is to make exceptional returns.

A leveraged buyout is the acquisition of another company using a significant amount of debt in order to finance the acquisition. In most cases, both the assets being acquired and the assets of the acquiring company are used as collateral to back the large loans required to finance the deal. The amount of capital contributed by the acquiring firm is usually minimal and it is not uncommon to see debt to equity ratios of greater than ten to one. The goal of the investors in a leveraged buyout is either to resell the acquired company for a substantial return or bring the company public after all or some of the debt is paid down or once it has become more profitable. Due to the limited equity contributed to the acquisition, these leveraged transactions can generate very large returns for the investors.

The reason companies like leveraged buyouts is that it allows them to make large acquisitions without having to commit a significant amount of their own capital. Leveraged buyouts in recent years have been far more common among two main groups; corporations and LBO funds, many of which are financial buyers. Corporations oftentimes find it easier to buy a company than to build one; an LBO can be an efficient way to acquire an existing company without tying up large amounts of equity. In contrast, LBO funds generally take companies private and sell off divisions in hope of yielding high returns, in many cases 40 percent or more.