Loading the player...

What is a 'Leveraged Buyout - LBO'

A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

BREAKING DOWN 'Leveraged Buyout - LBO'

In an LBO, there is usually a ratio of 90% debt to 10% equity. Because of this high debt/equity ratio, the bonds issued in the buyout are usually are not investment grade and are referred to as junk bonds. Further, many people regard LBOs as an especially ruthless, predatory tactic. This is because it isn't usually sanctioned by the target company. Further, it's seen as ironic in that a company's success, in terms of assets on the balance sheet, can be used against it as collateral by a hostile company.

Reasons for LBOs

LBOs are conducted for three main reasons. The first is to take a public company private; the second is to spin-off a portion of an existing business by selling it; and the third is to transfer private property, as is the case with a change in small business ownership. However, it is usually a requirement that the acquired company or entity, in each scenario, is profitable and growing.

History of LBOs

Leveraged buyouts have had a notorious history, especially in the 1980s, when several prominent buyouts led to the eventual bankruptcy of the acquired companies. This was mainly due to the fact that the leverage ratio was nearly 100% and the interest payments were so large that the company's operating cash flows were unable to meet the obligation. One of the largest LBOs on record was the acquisition of Hospital Corporation of America (HCA) by Kohlberg Kravis Roberts & Co. (KKR), Bain & Co. and Merrill Lynch in 2006. The three companies paid around $33 billion for the acquisition of HCA.

An LBO in Process

LBOs are often complicated and take a while to complete. For example, JAB holding company, a private firm that invests in luxury goods, coffee and healthcare companies, initiated an LBO of Krispy Kreme Doughnuts, Inc. in May 2016. JAB was slated to purchase the company for $1.5 billion, which included a $350 million leveraged loan and a $150 million revolving credit facility provided by the Barclays investment bank.

However, Krispy Kreme had debt on its balance sheet that needed to be sold, and Barclays was required to add an additional 0.5% interest rate in order to make it more attractive. This made the LBO more complicated and it almost didn't close. However, as of July 12, 2016, the deal went through.

RELATED TERMS
  1. Buyout

    The purchase of a company's shares in which the acquiring party ...
  2. Reverse Leveraged Buyout

    The offering of shares to the public by a company that was taken ...
  3. Busted Takeover

    A highly leveraged corporate buyout that is contingent upon the ...
  4. Bust-Up Takeover

    A corporate buyout in which the acquirer sells off a piece of ...
  5. Friendly Takeover

    A situation in which a target company's management and board ...
  6. Acquisition

    A corporate action in which a company buys most, if not all, ...
Related Articles
  1. Managing Wealth

    Investing in Leveraged Buyouts: Know the Risks

    Leveraged buyouts allow investors to make large acquisitions without a lot of capital. But LBOs carry big risks and result in huge returns or losses.
  2. Investing

    Understanding Leveraged Buyouts

    LBOs are often presented as predatory by the media, but it really depends on which side of the deal you're on.
  3. Insights

    10 Most Famous Leveraged Buyouts

    Learn about the boldest, riskiest leveraged buyouts in history and how they either become famous for failing miserably or making billions.
  4. Investing

    How The Big Boys Buy

    Learn what those in-the-know look for when acquiring a company.
  5. Small Business

    What's an Acquisition?

    In corporate terms, an acquisition is the purchase of a company or the division of a company. Some acquisitions are paid in cash, while others are paid with a combination of cash and the acquiring ...
  6. Investing

    Private Equity A Trendsetter For Stocks

    In this article, we'll show you how private equity sets the trend for stocks everywhere.
  7. Insights

    JAB Holdings Buys Krispy Kreme (KKD)

    The German private equity firm buys Krispy Kreme for $1.35 billion
  8. Insurance

    Key Players In Mergers And Acquisitions

    Strategic acquisition is becoming a part of doing business. Discover the different types of investor groups involved.
  9. Investing

    Keurig Owner JAB Holdings Buying Krispy Kreme

    JAB Holding Co. has been quietly creating a coffee empire that's well-positioned to take on industry leaders like Dunkin' Donuts (NASDAQ: DNKN).  The not-very-well-known firm recently completed ...
  10. Investing

    IPOs Are Becoming Less Attractive for Companies

    U.S. companies are choosing to be acquired instead of going public
RELATED FAQS
  1. How are leveraged buyouts financed?

    Understand the basics of a leveraged buyout, who is involved in executing the transaction and some of the various ways to ... Read Answer >>
  2. How is a leveraged buyout different from a buyout?

    Learn about leveraged buyouts and circumstances under which an acquiring company wishes to pursue a buyout funded mostly ... Read Answer >>
  3. How does a company decide whether it wants to engage in a leveraged buyout of another ...

    Learn how leveraged buyouts can be profitable by taking companies private, and understand why the debt loads in these deals ... Read Answer >>
  4. What are some examples of successfully executed leveraged buyouts?

    Learn about one of the most successful leveraged buyouts in corporate history that led to large profits for investors who ... Read Answer >>
  5. What happens to the stock prices of two companies involved in an acquisition?

    When a firm acquires another entity, there usually is a predictable short-term effect on the stock price of both companies. ... Read Answer >>
  6. How does the privatization of a publicly traded company work?

    Find out how a publicly traded company can privatize and remove itself from listed stock exchanges and out from under the ... Read Answer >>
Hot Definitions
  1. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  2. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  3. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  4. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  5. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  6. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
Trading Center