Table of Contents

Leveraged Buyout Scenarios: What You Need to Know

By

澳洲幸运5开奖号码历史查询:Michael Schmidt

Updated March 14, 2025

Reviewed by

Chip Stapleton

Fact checked by

Vikki Velasquez

Part of the Series

Guide to Mergers and Acquisitions

Mergers and Acquisitions (M&am꧟p;A): Types, Struct⛎ures, and Valuations

Basics of Mergers & Acquisitions

Takeovers

Reverse Mergers

Effects of M&A

M&A Transactions and Processes

Types of M&A

M&A Examples

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Leveraged buyouts (LBOs) have probably had more bad publicity than good because they make great stories for the press. However, not all LBOs are regarded as predatory. They can have both positive and negative effects, depending on which side of the deal you're on.

A leveraged buyout is a generic term for the use of leverage to buy out a company. The buyer can be the current management, the employees, or a private equity firm. It's important to examine the scenarios thatꦑ drive LBOs to understand their possible effects. Here, we look at four examples: the repackaging plan, the split-up, the portfolio plan, and the savior plan.

Key Takeaways

A leveraged buyout is when one company is purchased through the use of leverage.
There are four main leveraged buyout scenarios: the repackaging plan, the split-up, the portfolio plan, and the savior plan.
The repackaging plan involves buying a public company through leveraged loans, making it private, repackaging it, and then selling its shares through an initial public offering (IPO).
The split-up involves purchasing a company and then selling off its different units for an overall dismantling of the acquired company.
The portfolio plan looks to acquire a competitor with the hopes of the new company being better than both through synergies.
The savior plan is the purchase of a failing company by its management and employees.

The Repackaging Plan

The 澳洲幸运5开奖号码历史查询:repackaging plan usually involves a private equity company using 澳洲幸运5开奖号码历史查询:leveraged loans from the outside to take a currently public company private by buying all of its outstanding stock. The buying firm's goal is to repackage the company and return it to the marketplace in an 澳洲幸运5开奖号码历史查询:initial public offering (IPO).

The acquirin💜g firm usually holds the company for a few years to avoid the watchful eyes of shareholders. This allows tꦆhe acquiring company to make adjustments to repackage the acquired company behind closed doors.

Then, it offers the repackaged company back to the market as an IPO with some fanfare. When this is done on a lar🥀ger scale, private firms buy many companies at once in an attempt to diversify their risk among various industries.

Important

澳洲幸运5开奖号码历史查询:Private equity firms typically borrow up to 80% to 90% of the purchase price of a company when enacting a leveraged buyoᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚut. The remainder is funded ღthrough their own equity.

Those who stand to benefit from a deal like this are the original shareholders (if the offer price is greater than the market price), the company's employees (if the deal saves the company from failure), and the private equity firm that generates fees from the day the buyout process starts and holds a portion of the stock until i💙t goes public again.

Unfortunately, if no major changes are made to the company, it can be a 澳洲幸运5开奖号码历史查询:zero-sum game, and the new shareholders get the same 🐷finꦚancials the older version of the company had.

The Split-Up

The split-up is considered to be predatory by many and goes by several names, including "slash and burn" and "cut 𒁃and run." The underlying premise of this plan is that the company, as it stands, is worth more when broken up or with its p🃏arts valued separately.

This scenario is fairly common with conglomerates that have acquired various businesses in relatively unrelateꦿd industries over many years.

The buyer is considered an outsider and may use aggressive tactics. Often in this scenario, the firm dismantles the acquired company after purchasing it and sells its parts to th🍷e highꦐest bidder. These deals usually involve massive layoffs as part of the restructuring process.

It may seem like the equity firm is the only party to benefit from this type of deal. However, the pieces of the company that are sold off have the potenꦍtial to grow on their own and may have been stymied before by the chains of the c📖orporate structure.

The Portfolio Plan

The portfolio plan has the potential to benefit all participants, including the buyer, the management, and the employees. Another name for this method is the leveraged build-up, and the concept is both defensive and a๊ggressive in nature.

In a competitive marketplace, a company may 澳洲幸运5开奖号码历史查询:use leverage to acquire one of its competitors (or any company where it could achieve syn🐓ergies from the acquis♏ition).

The plan💃 is risky: The company needs to make sure the return on its invested capital exceeds its cost to acquire, or the plan can backfire. If successful, then the shareholders may receive a good price on their stock, current management can be retained, and the company may prosper in its new, larger form.

The Savior Plan

The 澳洲幸运5开奖号码历史查询:savior plan is often drawn up with good intentions but frequently arrives too late. This scenario typically includes a plan involving management and employees borrowing money to save a failing company. The term "employee-owned" oft♐en comes to mind after one of these deals goes through.

While the concept is commendable, the likelihood of success is low if the same management team and tactics stay in place. Another risk is that the company may not be able to pay back the borrowed money quickly enough to offset high borrowing costs and see a return on the investment𝐆. On the oth🍸er hand, if the company turns around after the buyout, then everyone benefits.

What Is a Leveraged Buyout?

A leveraged buyout is a method of buying a company primarily through debt financing. It is often employed by private equity firms when making acquisitions. The assets of 🌄the company being acquired usually serve as the collateral for the loan. The strategy is employed by PE firms as it requires little initial capital on their end. The goal is to purchase the company, make improvements, and then sell it for a profit oꦐr take it public.

What Are the Risks of a Leveraged Buyout?

Leverage buyouts are risky because they involve using borrowed money to acquire a business, with the goal of improving its operations and selling it for a pro꧟fit. The business being acquired is responsible for the debt repa𒅌yments via its cash flows.

If the business does not generate enough cash flow, it will struggle to meet debt obligations, which could lead to default and bankruptcy. For the private equity firm that makes the business acquisition, the main risk is not being able to improve the business's value and sell it for a profit, which could result in a financial loss.

How Can I Invest in a Leveraged Buyout?

Asܫ an individual investor, it is extremely difficult to invest in leveraged buyouts (LBO) as they are executed by private equity (PE) firms that have a large financial base and access to financing. You could invest in private equity funds, however, the minimum requirements are extremely high.

Alternatively, you could buy shares of companies that make LBOs, such as Blackstone or KKR. Private equity exchange-traded funds (ETF🍰s) exist whereby individual investors can gain access to the strategies PE firms specialize in. Generally speaking, however, it is unlikely for indivဣidual retail investors to be able to invest in leveraged buyouts.

The Bottom Line

While there are forms of LBOs that lead to massive layoffs and asset selloffs, some LBOs can be part of a long-term plan to save a company through 澳洲幸运5开奖号码历史查询:leveraged acquisitions. Regardless of what they are called or how they are portrayed, they will aဣlways be a part of an economy as long🃏 as there are companies, potential buyers, and money to lend.