For years, leveraged buyouts (LBOs) have been viewed in a negative light, but that view is beginning to change as businesses on both sides of the table begin to see the advantages of this type of acquisition. The truth is that leveraged buyouts can be beneficial for both the purchasing company and the acquired company. The most common advantages come in the forms of capital requirements, corporate structure and management commitment.
The most obvious advantage of leveraged buyouts is the small capital requirement for the acquiring company. Because LBOs are financed by funds secured with current and future assets of both companies, very little of the acquiring company’s own money is needed to secure the financing. The purchase of a smaller business that can produce returns greater than the acquisition company’s debt financing is beneficial to stockholders of both companies and the value of the company as a whole increases.
Another advantage of a leveraged buyout is that an acquired company can experience a revitalization as a result of corporate restructuring. This could come in the form of modification or replacement of executives or managers, streamlining or eliminating unnecessary departments and reducing or eliminating unnecessary expenditures. This doesn’t mean that everyone loses their job in a leveraged buyout scenario; it does mean that, when done correctly, existing jobs are secured and new jobs are created.
Leveraged buyouts commonly involve taking an existing business from being publicly held to being privately held. What this means is that, instead of a large group of people owning a few shares each, a small group of people own a large number of shares in the company. Because the majority of the shares in privately held companies are possessed by management, the management stands to lose more if the company should fail. This works as a strong motivator for the people in charge to ensure the profitability and success of the company.
Rather than being a hostile takeover by a ruthless corporation, a leveraged buyout can be the saving grace for companies teetering on the edge. LBOs don’t have to be predatory. In fact, many are done with the goal of repackaging an existing company to ensure its future success in the marketplace. In the best case scenario, leveraged buyouts ensure that all parties, on both sides, experience benefits in terms of increased stock prices, retention of current management and increased potential for success in a new, larger form.