Chapter 89. Leveraged Buyouts

PASCAL QUIRY

Professor of Corporate Finance, HEC, Paris

MAURIZIO DALLOCCHIO

Lehman Brothers Professor of Corporate Finance, Bocconi University

YANN LEFUR

Professor of Corporate Finance, HEC, Paris

ANTONIO SALVI, PhD

Professor of Corporate Finance, EM Lyon and Bocconi University

Abstract: A leveraged buyout (LBO) is a transaction wherein the purchase of a company is financed primarily with borrowed funds. An LBO is often a solution in a family succession situation or when a large group wants to sell off a division. It can also be a way for a company to delist itself when it is undervalued in the market. The financing structure of an LBO is frequently articulated over multiple layers of debt—senior, junior, mezzanine—with different repayment priority. As priority declines, risk and expected returns increase. The heavier debt burden motivates management to do a better job managing the company, of which they are often destined to become shareholders themselves.

Keywords: leveraged buyout (LBO), holding company, financial leverage, leveraged management buyout (LMBO), buy-in and a management buyout (BIMBO), leveraged buildup (LBU), synergies, senior debt, junior or subordinated bonds, mezzanine debt

A leveraged buyout (LBO) is a form of corporate acquisition. Equity capital is reduced by the increase of financial leverage. There is usually a concomitant change in control. Why are financial investors willing to pay more for a company than a trade buyer/investor? Are ...

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