Question

"A company looks to acquire a competitor hoping that the new company is better than both through synergies can use LBO for raising capital called the portfolio plan." What are some disadvantages of this Portfolio Plan?

Answer 1

COMPANY IS ACQUIRING THROUGH LEVERAGED BUYOUT (LBO)

So LBO can backfire in following ways-

Not all LBOs are successful, however, so there are also some potential disadvantages to consider.

1.If the company's cash flow and the sale of assets are insufficient to meet the interest payments arising from its high levels of debt, the LBO is likely to fail and the company may go bankrupt.

2.Attempting an LBO can be particularly dangerous for companies that are vulnerable to industry competition or volatility in the overall economy.

3.If the company does fail following an LBO, this can cause significant problems for employees and suppliers, as lenders are usually in a better position to collect their money.

4.Another disadvantage is that paying high interest rates on LBO debt can damage a company's credit rating. Finally, it is possible that management may propose an LBO only for short-term personal profit.