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Leveraged Buyout (LBO)

A leveraged buyout (LBO) is a transaction in which a company is acquired using a significant amount of borrowed funds, with the acquired company’s assets often used as collateral for the loan. LBOs are commonly executed by private equity firms looking to take over companies and improve their profitability. The goal of an LBO is to enhance returns through the use of leverage, but it also carries the risk of financial distress if the company is unable to service the debt.

Example

A private equity firm acquires a manufacturing company through an LBO, using the company’s assets as collateral for the loan, with plans to restructure the company and increase its profitability.

Key points

• A transaction where a company is acquired using borrowed funds, with the target company’s assets as collateral.

• Common in private equity, aimed at improving profitability through restructuring.

• Increases financial risk, as the company must service the large debt load.

Quick Answers to Curious Questions

The goal is to acquire a company using borrowed funds to improve its profitability, often through restructuring, while increasing the return on investment through leverage.

The primary risk is financial distress if the company cannot generate enough cash flow to service the large debt used to finance the acquisition.

Private equity firms use LBOs to acquire companies, often restructuring them to enhance profitability, with the intention of selling them for a profit in the future.