A going-private transaction in which a large percentage of the money used to buy the outstanding stock is borrowed is called a leveraged buyout.
What is leveraged buyout?
- The acquisition of another firm through a leveraged buyout (LBO) involves employing a sizeable sum of borrowed funds (bonds or loans) to cover the acquisition costs.
- Along with the assets of the acquiring firm, the assets of the target company are sometimes used as collateral for loans.
- A leveraged buyout (LBO) typically has a debt to equity ratio of 90% to 10%.
- The bonds issued in the buyout are typically not investment grade and are referred to as junk bonds as a result of this high debt/equity ratio.
LBOs have a reputation for being particularly brutal and predatory strategies because the target firm typically doesn't approve the purchase.
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