Question

What is the relevance of Leveraged buyouts (LBOs) to Mergers, Acquisitions and Divestitures?

Answer 1

LBO can be shortly described as:

• A method of acquisition using leverage, i.e. a company borrows a significant amount of money to acquire another company.
• The assets of the acquired company are generally kept collateral while the borrowing is done
• This type of acquisitions allows the company less commitment towards the capital
• Once the deal is closed it completely changes the capital structure of the acquired company.

The relevance of Leveraged buyouts (LBOs) to Mergers, Acquisitions, and Divestitures are

1. When a company wants to divestiture means disinvest, it can partially or fully dispose of a business unit through sale, exchange, closure. So a buyer would buy this unit through leveraged loans or LBO as it has several advantages associated with it. This is called a repacking plan using LBO.
2. A company could buy the business unit from the disinvesting company through LBO and would like to dismantle it completely by selling its different units which is called a split-up strategy.
3. 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
4. A company might merge its subsidiary for saving it from a hostile takeover or from a downturn by using LBO to raise the capital for a merger called a savior plan.

So these are the possible scenarios where LBO is useful for Merger, Acquisitions, Divestitures.