Leveraged Buyout
Abbreviation
LBO
A Leveraged Buyout (LBO) takes place when a company is bought with a combination of debut and equity financing.
Typical Seps of a Leveraged Buyout (LBO)
- A company is bought
- The purchase is financed with a combination fo equity and debt
- The debt is secured by the cashflow of the company(this is where the 'leverage' comes from
- Improve the companie's operations
- Sell the company privately or take it public
Common Characteristics
- Commonly used to take a public company private
- Commonly used to purchase profitable cash-flow positive companies
- The tactic is commonly used by Private Equity Firms
- Often times the purchases will provide themselves with a large cash dividend at the time of the transaction (funded by the new debt)
Pricing a Leveraged Buyout
- The firm being acquired is usually priced based on an EBITDA multiple.
- EBITDA is used because the acquire plans to restructure how the company is financed and taxed. Therefore a valuation based on operations is used.
History and Similarity to Private Equity
- Leverage Buyout was the term originally used for Private Equity
- After junk-bond troubles in the 1980s, the name shifted to Private Equity for better perception
- Can also be referred to as LBO (Leveraged Buyout Offer)