Leveraged Buyout (LBO) Private Equity

LBO
In corporate finance, a leveraged buyout (LBO) is a transaction where a

company is acquired using debt as the main source of consideration. These
transactions typically occur when a private equity (PE) firm borrows as much
as they can from a variety of lenders (up to 70 or 80 percent of the purchase
price) and funds the balance with their own equity.
Characteristics of LBO
1. Stable cash flows - The company being acquired in a leveraged buyout
must have sufficiently stable cash flows to pay its interest expense and
repay debt principal over time. So mature companies with long-term
customer contracts and/or relatively predictable cost structures are
commonly acquired in LBOs.
2. Relatively low fixed costs - Fixed costs create substantial risk for Private
Equity firms because companies still have to pay them even if their
revenues decline.
3. Relatively little existing debt - The "math" in an LBO works because the
private equity firm adds more debt to a company's capital structure, and
then the company repays it over time, resulting in a lower effective
purchase price; it's tougher to make a deal work when a company
already has a high debt balance.
4. Valuation - Private equity firms prefer companies that are moderately
undervalued to appropriately valued; they prefer not to acquire
companies trading at extremely high valuation multiples (relative to the
sector) because of the risk that valuations could decline.
5. Strong management team - Ideally, the C-level executives will have
worked together for a long time and will also have some vested interest
in the LBO by rolling over their shares when the deal takes place.
Source of LBO Financing

A leveraged buyout (LBO) is a transaction in which the buyer borrows a
significant portion of the requisite funds to purchase the specified asset from
the seller. LBOs are often executed by private equity groups. When the
existing ownership of a business is looking to exit, it often finds willing buyers
among private equity firms.
In addition to the equity provided by the private equity sponsor, buyers often
use borrowed funds to comprise the total purchase price when executing a
buyout. A key feature of an LBO is that the borrowing takes place at the
company level, not with the equity sponsor. The company that is being bought
out by a private equity sponsor essentially borrows money to pay out the
former owner.
➢ Bank Financing: A private equity sponsor often uses borrowed funds
from a bank or from a group of banks called a syndicate. The bank
structures the debt (revolving, term debt or both) in various tranches
and lends money to the company for working capital and to pay out the
exiting ownership.
➢ Bonds or Private Placements: Bonds and private notes can be a
source of financing for an LBO. A bank or bond dealer acts as an
arranger in the bond market on behalf of the company being sold,
assisting the company in raising the debt on the public bond market.
➢ Mezzanine, Junior or Subordinated Debt: Subordinated debt (also
called mezzanine debt or junior debt) is a common method for
borrowing during an LBO. It often takes place in conjunction with senior
debt (bank financing or bonds as described above) and has features
that are both equity-like and debt-like.
➢ Seller Financing: Seller financing is another means of financing an
LBO. The exiting ownership essentially lends money to the company
being sold. The seller takes a delayed payment (or series of payments),
creating a debt-like obligation for the company, which, in turn provides
financing for the buyout.
Advantages of LBO
• Responsibility to pay interest and repay the debt, forces the
management to perform better which results in increased productivity.
• Restructuring and use of the acquired firm’s asset saves the costs
Economies of scale
• For better performance technology is updated and large amounts of
production leads to economies of scale.
• Because of huge Debt; payments of dividends are not necessary.
• Tax shield: Because of debt financing, there are interest tax shields
which increases cash flow to the shareholders.
Limitation of LBO
• There are uncertainties associated with financials.
• Because of high leverage, there will be inappropriate investment policy
• If the cash flow is low and an inability to pay principal and debt, can lead
to bankruptcy of the firm.
• Carrying out LBO deal can be dangerous to the companies which are
vulnerable to competition.
• High debt payment may affect company’s credit rating.
MBO
A management buyout (MBO) is a transaction where a company’s
management team purchases the assets and operations of the business they
manage. A management buyout is appealing to professional managers
because of the greater potential rewards and control from being owners of the
business rather than employees.
Objectives of MBO
• Management buyouts are conducted by management teams as they
want to get the financial reward for the future development of the
company more directly than they would do as employees only.
• A management buyout can also be attractive for the seller as they can
be assured that the future stand-alone company will have a dedicated
management team thus providing a substantial downside protection
against failure and hence negative press.
• Additionally, in the case the management buyout is supported by a
private equity fund (see below), the private equity will, given that there is
a dedicated management team in place, likely pay an attractive price for
the asset.
International Merger & Restructuring

➢ International mergers and acquisitions are growing day by day. These
mergers and acquisitions refer to those mergers and acquisitions that
are taking place beyond the boundaries of a particular country.
International mergers and acquisitions are also termed as global
mergers and acquisitions or cross-border mergers and acquisitions.
➢ Globalization and worldwide financial reforms have collectively
contributed towards the development of international mergers and
acquisitions to a substantial extent. International mergers and
acquisitions are taking place in different forms, for example horizontal
mergers, vertical mergers, conglomerate mergers, congeneric mergers,
reverse mergers, dilutive mergers, accretive mergers and others.
➢ International mergers and acquisitions are performed for the purpose of
obtaining some strategic benefits in the markets of a particular country.
With the help of international mergers and acquisitions, multinational
corporations can enjoy a number of advantages, which include
economies of scale and market dominance.
➢ International mergers and acquisitions play an important role behind the
growth of a company. These deals or transactions help a large number
of companies penetrate into new markets fast and attain economies of
scale. They also stimulate foreign direct investment or FDI.
➢ The reputed international mergers and acquisitions agencies also
provide educational programs and training in order to grow the expertise
of the merger and acquisition professionals working in the global merger
and acquisitions sector.
➢ The rules and regulations regarding international mergers and
acquisitions keep on changing constantly and it is mandatory that the
parties to international mergers and acquisitions get themselves
updated with the various amendments. Numerous investment bank
professionals, consultants and attorneys are there to offer valuable and
knowledgeable recommendations to the merger and acquisition clients.
Factors Affecting International Mergers

and Acquisitions
The following elements influence the international mergers and
acquisitions from many aspects:
• Corporate governance
• Company acts
• The capacity of average workers
• Expectation of the consumers
• Political features of a country
• Tradition and culture of a country

Leveraged Buyout (LBO) Private Equity

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LBO

In corporate finance, a leveraged buyout (LBO) is a transaction where a

Source of LBO Financing

International Merger & Restructuring

Factors Affecting International Mergers

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