Leveraged Buyout (LBO)

A Leveraged Buyout (LBO) is a financial transaction in which a company is acquired using a significant amount of borrowed funds, typically secured by the Assets of the company bEINg purchased. In an LBO, the buyer uses a combination of debt and Equity to finance the acquisition, with the expectation that the future Cash Flows generated by the acquired company will be sufficient to repay the borrowed funds. This strategy allows the acquiring firm to take control of the target company while minimizing the amount of Capital it must invest upfront.

Examples of LBOs include:

• KKR and RJR Nabisco (1989): This was one of the most famous LBOs in history, where Kohlberg Kravis Roberts & Co. acquired RJR Nabisco for $31.1 billion, funded primarily through debt.
• Hertz Global Holdings (2011): The Carlyle Group and Merrill Lynch acquired Hertz for $15 billion, using a mix of Equity and substantial debt financing.

Cases of LBOs may vary in success:

• Successful Case: The acquisition of Dell by Silver Lake Partners and Michael Dell in 2013, where restructuring led to improved performance.
• Unsuccessful Case: The buyout of Toys “R” Us in 2005 by a group of Equity/">Private Equity firms resulted in Bankruptcy in 2018, largely due to heavy debt burdens.