Leveraged Buyout (LBO)

A leveraged buyout (LBO) is a type of corporate acquisition in which acquirors – mainly private equity firms and other types of financial investors – acquire companies they perceive as inefficient or undervalued by using borrowed money and only a small injection of equity (typically 20%-35% of the purchase price). Acquirors pay back the often considerable debt loads using the operating cash flows of the business being acquired. Minimising the amount of equity committed mechanically increases the nominal internal rates of return of the LBO strategy. A typical LBO strategy is a so-called take-private, where a financial investor acquires a publicly quoted company and delists it from the stock exchange in order to carry out a corporate restructuring to improve the financial performance of the business without the scrutiny that comes with public-company transparency. The ultimate goal of a financial investor in an LBO is to turn companies around in a limited time horizon in order to sell businesses at a profit, either by making them public again via an IPO or selling to another financial investor in so-called secondary buyouts. Buyouts where management acquires the company is a Management Buyout (MBO).