Lessons in Corporate Finance, 2nd Edition

CHAPTER 18Leveraged Buyouts and Private Equity Financing (Congoleum)

This chapter will introduce the reader to leveraged buyouts (LBOs), which today often take place under the guise of private equity financing. It will explain how LBOs work and where the value created by LBOs comes from. As an example, we will use the 1979 leveraged buyout of Congoleum Corporation. This LBO, many times larger than any prior LBO, served as the template for many future LBOs and for today's private equity takeovers.¹

CONGOLEUM: A SHORT HISTORY

Founded in 1886, Congoleum Narin was a flooring product firm that originally produced flooring from raw materials sourced in the Congo (hence the name Congo-leum). It later began producing linoleum, a flexible vinyl floor covering made from ground cork or wood, oxidized linseed oil with powdered pigments, and organic materials. Congoleum was an early producer of linoleum and owned several patents for improvements they made in the production process.²

In 1968, Bath Industries (a holding firm that owned Bath Iron Works, one of the oldest shipbuilding firms in the United States) acquired control of Congoleum Narin after purchasing 42% of its stock. Bath Industries renamed itself Congoleum Industries in 1975 because floor coverings represented 40% of the postacquisition conglomerate's sales and 95% of its profits.

The Players

Byron C. Radaker arrived at Congoleum in 1975, became COO in 1976, President and CEO in 1977, and then Chairman in 1980. Byron had previously ...