Leveraged buyout (LBO) is a technique of acquiring a company that would create a company-vehicle. Many investors acquire a company (the target) via a parent company (also called holding) created for the occasion often referred to by the generic name of Newco. Which provides the debt financing capacity of the target company, and will be capitalized by the buyers, only up to the balance of the purchase price (leverage).
The LBO is often a solution to a family succession or assignment by a satellite division. It can also help a company when it is poorly utilized or when its management and shareholders no longer receive the benefit of trading because of the severe constraints that the initial public offering places on a society.
An LBO is produced around the current management or new management team and is funded by equity investment funds, and employees of the company (mainly its management team). The assembly is based on an architecture of debt (structured finance) with different priorities for reimbursement (senior debt, junior subordinated debt, mezzanine) and thus increasing risks and rewards.
Value creation is often observed during an LBO, and is explained not only by the leverage and the deductibility of financing costs, but rather by the growth of the company.
The LBO can thus be defined as the purchase of a company, financed partly by borrowing, under a specific legal and tax optimized scheme, in situations where leaders are involved in partnership with specialized professional investors.
Unlike traditional bank loans it is often linked to an investment designed to improve business results, the LBO debt does not give any consideration to the target (there is no acquisition of specific assets ). Provided that debt has a value, such as the possibility of acquiring the target company.
A company may decide to buy back its shares if the stock price is falling sharply. The rise in the price obtained is not restricted only when it is launched by the purchase request and shows the decreasing shares held by third parties.
The company reduces the actions to be remunerated, and on equal profits the dividend per share is higher, and consequently the price if calculated based on the expected profit and other fundamentals.
The repurchase may also have speculative purposes, that is, to create a price above the average for the preceding periods.
Management teams are often stakeholders in management buyouts. They are responsible for operational management of the target company. These teams are either teams already in place before the operation or are recruited outside managers as part of the transaction.