A leveraged buyout (LBO) is a takeover of a company when debt capital is the main financing source for the acquisition and the acquired assets are used as collateral to receive the needed debt. The LBO may be executed by a financial investor, which is another company or some persons.
The target of leveraged buyout can be any company but the most convenient targets for the LBO are companies with high and stable cash flows as utilities or telecom companies or companies that have valuable assets, for example, real estate.
Leveraged buyouts use very high ratio of financial leverage for financing the deal. Sometimes the deal gets accomplished without any equity capital invested only using the debt capital. But most of the times some equity capital is used which may amount from 10% to 30% in an LBO case. The debt capital is provided by the banks or investors in junk bond form, usually requires to pay high interest rate for the debt which makes such type of deals risky. Because of required low equity investments, leverage buyouts are loved by “financial sharks”, especially in emerging markets, and play a significant role in M&A market. If the acquirers are company’s management then it is a management buyout.
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