What is an LBO and how does it work?

A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. In other words, the assets of the target company are used, along with those of the acquiring company, to borrow the needed funding that is then used to buy the target company.

What is the largest LBO in history?

The largest leveraged buyout in history was valued at $32.1 billion, when TXU Energy turned private in 2007.

Who invented the LBO?

In fact, it is Posner who is often credited with coining the term “leveraged buyout” or “LBO.” The leveraged buyout boom of the 1980s was conceived in the 1960s by a number of corporate financiers, most notably Jerome Kohlberg, Jr. and later his protégé Henry Kravis.

What makes a good LBO?

An LBO candidate is considered to be attractive when the business characteristics show sustainable and healthy cash flow. Indicators such as business in mature markets, constant customer demand, long term sales contracts, and strong brand presence all signify steady cash flow generation.

What makes a good LBO target?

Why are LBOs popular?

LBOs enjoy popularity in the mergers and acquisitions environment because they are often capable of delivering a win-win for both the bank and the financial sponsor. Banks can make significantly greater margins by supporting the financing of LBOs compared to typical corporate financing.

Who is Kohlberg in KKR?

Jerome Kohlberg
Jerome Kohlberg, an architect of the leveraged buyout and co-founder of private-equity giant KKR KKR -3.92\% & Co., has died. He was 90. Mr. Kohlberg died at his Martha’s Vineyard home on Thursday after a long battle with cancer, according to Kohlberg & Co., the firm he founded after he left KKR in 1987.

How does LBO make money?

A leveraged buyout (LBO) is a type of acquisition in the business world whereby the vast majority of the cost of buying a company is financed by borrowed funds. LBOs are often executed by private equity firms who attempt to raise as much funding as possible using various types of debt to get the transaction completed.

What is a paper LBO?

The Paper LBO refers to a common interview exercise during the private equity recruiting process. Typically, the interviewee will usually receive a “prompt” – a short description containing a situational overview and certain financial data for a hypothetical company contemplating an LBO.

What kind of collateral is available for an LBO?

Note that in close to all cases of LBOs, the only collateralization available for the debt are the assets and cash flows of the company. The financial sponsor can treat their investment as common equity or preferred equity among other types of securities. Preferred equity can pay a dividend and has payment preferences to common equity.

What happened to the dotcom bubble in 1999?

The dotcom bubble started collapsing in 1999, and the fall precipitated from March 2000 until 2002. Several tech companies that conducted an IPO during the era declared bankruptcy or were acquired by other companies. Others hung by a thread as their stocks plunged to levels so low it was never envisaged.

What caused the dot-com bubble?

Money pouring into tech and internet company start-ups by venture capitalists and other investors was one of the major causes of the dotcom bubble. In addition, cheap funds obtainable through very low interest rates made capital easily accessible.

How much debt are banks willing to support an LBO?

The amount of debt that banks are willing to provide to support an LBO varies greatly and depends, among other things, on the quality of the asset to be acquired, including its cash flows, history, growth prospects, and hard assets; history, experience and equity supplied by the financial sponsor; and the overall economic environment.