Principles of Managerial Finance, 15th Edition

18.2 LBOs and Divestitures

1. LG2

Before we address the mechanics of merger analysis and negotiation, you need to understand two topics that are closely related to mergers: leveraged buyouts (LBOs) and divestitures. An LBO is a method of structuring an acquisition, and divestitures involve the sale of a firm’s assets.

Leveraged Buyouts (Lbos)

A common technique used to make acquisitions is the leveraged buyout (LBO), which involves the use of a large amount of debt to purchase a firm. LBOs are a clear-cut example of a financial merger undertaken to create a high-debt private corporation with improved cash flow and value. Typically, in an LBO, 90% or more of the purchase price is financed with debt. A large part of the borrowing is secured by ...