Leveraged Buy Outs

You may remember the term leveraged buy outs or LBO’s from the 1980’s where it seemed to be in vogue on Wall Street. Business expert Phil Thow says leveraged buy outs are still in vogue and many companies engage in them, just not to the fanfare of the Miami Vice ‘80’s. Leveraged buy outs aren’t as sexy as they used to be, but they are just as useful for some healthy companies looking to expand and combine synergies from companies that may be in trouble or are just looking for suitable partner. The main thrust is to bolsters the assets of the acquiring company without dipping too deeply into its own resources.

The mechanics of leveraged buy outs are very interesting and as Phil Thow says worthy of understanding and analyzing to understand how companies carry them out. Basically, one company seeks out another who may be in danger of going out of business, is in a significant downturn, or is just looking to partner up with a company with more resources. In some cases leveraged buy outs can be hostile with the acquiring company giving the company being acquired little or no choice in going along with the plan.

The financing aspect of leveraged buy outs works like this, the acquiring company uses the assets of the target company as collateral to obtain financing. The paper that is issued is not considered investment grade because of the possible risks involved in acquiring a financially sick company. Phil Thow says that there are some great benefits for the acquiring firm in addition to fixed assets such as, acquiring the cash flow of the target company, and additional sales from the target companies customer base. Leveraged buy outs can work well for any size company if they are well thought out and based on solid financial information.

There are pitfalls to leveraged buy outs as well, and expert Phil Thow warns against falling into them. It is possible for the paper issued to the acquiring company to reach junk status. In other words, if the buyout benefits are overstated and the acquiring company is unable to make good on making the payments to the issuer, the bonds become junk bonds, thus valued very poorly. Recovery from such an occurrence can be tough. Leveraged buy outs are not be done hastily, due diligence is of the utmost importance according to Phil Thow.