BUYOUT STRATEGIES

Effect of leverage buyouts on private equity firms



Effect of leverage buyouts on private equity firms

Introduction

Leveraged Buy Out has developed strongly over the last twenty years. They are a kind of financial engineering operation, particularly used by investment funds for the takeover of companies. A leveraged buyout or LBO is therefore an acquisition or merger of a company or a segment of an organization with a considerable portion of funds obtained by taking a loan.Leveraged buyout is therefore an operative cycle consisting of the purchase of all or most of the capital of a company. In general, the entire operating cycle or substantial portion of the price is funded through loans secured by assets acquired by company itself or by the assumption of part of its debt, which will be canceled with the flow of funds. New cash flows from the bought out business are then used to pay the debt from the buyout.

The modalities involved in the implementation of a leverage buyout includes the following The acquiring company borrows money and gives the target guarantees. The acquired company assumes the debt of its parent, or

Controlling and controlled companies are merged (merger leveraged buyout), either by absorbing the first to the second (Forward leveraged buyout) or vice versa (reversed leveraged buyout) moving to target the liabilities generated by the purchase of its own actions.

Debt financing involved in the leveraged buyout is therefore borrowing money from a source with the plan to disburse back the amount which includes the principal plus and an established interest. An advantage of debt financing is that the one who use it can retain its ownership. Corporate balance sheets typically use principal and interest payments as a business expense which can be deducted from income taxes. Often times, companies can use smaller interest rates on loans (Ambrose et al, 1992,pp. 89-101).

Discussion

Historical background

Although the history of the first leveraged buyout is unclear, economists and historians believed that the first leveraged buyout occurred after World War II. After the Great Depression, corporate leaders assumed best to keep corporate debt low. The first known leveraged buyout was the purchase by McLean Industries in January 1955 followed by the purchase by Waterman Steamship Corporation in May 1955 (Committee on the Global Financial System, 2008, pp 5-7). The beginning of large scaled LBO market in the world economic environment was noticed in the mid-1990s. The world record for the large volume of

Funding attracted for an LBO was raised in the year 2006, when Investment Company's like Kohlberg Kravis Roberts & Co, Bain Capital LLC and Merrill Lynch & Co acquired the largest U.S. hospitals network operator HCA Inc. The Amount of transaction totaled $ 33 billion, which involved long term funding. The popularity of LBO-transactions increased in the mid-2000s, which was subject to the overall economic and financial stability world markets (Amess,et al, 2002p. 35-45).

The “Mega-Buyout from 2005-2007” was brought on by reducing interest rates, slacked lending standards and governmental regulatory changed for ...