Understand the leveraged buyout program

Leveraged buyouts (LBOs) may be more effective than advertised because they produce great reports for the media. However, not all leveraged buyouts are considered predatory. They can have positive and negative effects, depending on which side of the transaction you are on.

Leveraged buyout is a general term for companies using leveraged buyouts. Buyers can be current management, employees, or private equity companies. It is important to examine the scenarios that prompted the leveraged buyout to understand its possible impact. Here, we look at four examples: repackaging plan, spin-off plan, investment portfolio plan and savior plan.

Key points

  • Leveraged buyout refers to the use of leverage to buy a company.
  • There are four main types of leveraged buyout programs: repackaging plans, spin-offs, portfolio plans, and savior plans.
  • The repackaging plan involves buying a public company through a leveraged loan, privatizing it, repacking it, and then selling its shares through an initial public offering (IPO).
  • Spin-off involves acquiring a company and then selling its different divisions in order to dismantle the acquired company as a whole.
  • The investment portfolio plan aims to acquire a competitor, hoping that the new company will outperform the two through synergies.
  • The Savior Plan is that its management and employees buy a failed company.

Repackaging plan

The repackaging plan usually involves a private equity company using an external leveraged loan to privatize the current public company by purchasing all of its outstanding shares. The goal of acquiring the company is to repackage the company and return it to the market through an initial public offering (IPO).

Acquiring companies usually hold the company for several years to avoid the attention of shareholders. This allows the acquiring company to adjust to repackage the acquired company behind closed doors. Then it relisted the repackaged company with great fanfare as an IPO. When the scale is larger, private companies will acquire many companies at the same time in an attempt to diversify risks in various industries.

When implementing leveraged buyouts, private equity firms usually borrow 70% to 80% of the company’s purchase price. The rest of the funding comes from their own equity.

Those who would benefit from such a transaction are the original shareholders (if the offer price is higher than the market price), the company employees (if the transaction saves the company from failure), and the private equity company that incurred expenses from the acquisition process started and held some shares Until the day when it is listed again. Unfortunately, if no major changes are made to the company, this may be a zero-sum game, and the new shareholders will get the same financial situation as the old company.


Split is considered by many to be predatory and has several names, including “slash and burn” and “cut and run.” The basic premise of the plan is that, as far as the current situation is concerned, the company is more valuable when splitting or separately assessing part of its value.

This situation is quite common for corporate groups that have acquired various businesses in relatively unrelated industries for many years. Buyers are seen as outsiders and may use aggressive strategies. In this case, the company usually dissolves the company after acquiring it and sells its parts to the highest bidder. As part of the restructuring process, these transactions usually involve large-scale layoffs.

Equity companies appear to be the only party benefiting from such transactions. However, the part of the company being sold may grow on its own and may have previously been hindered by the company’s structural chain.

Portfolio plan

The portfolio plan has the potential to benefit all participants, including buyers, management and employees. Another name for this method is leverage accumulation, a concept that is both defensive and aggressive in nature.

In a highly competitive market, a company may use leverage to buy one of its competitors (or any company that can achieve synergies through acquisitions). The plan is risky: the company needs to ensure that the return on its invested capital exceeds its acquisition cost, otherwise the plan may backfire. If it succeeds, then shareholders’ stocks may get a good price, existing managers may be retained, and the company may prosper in a new and larger form.

Savior plan

The savior’s plan is often made out of good faith, but it often comes too late. This situation usually includes a plan that involves management and employees borrowing money to rescue a failed company. After one of the transactions is completed, the term “employee-owned” often comes to mind.

Although this concept is commendable, if you maintain the same management team and strategy, the probability of success will be low. Another risk is that the company may not be able to repay the borrowed funds quickly enough to offset high borrowing costs and see a return on investment. On the other hand, if the company turns losses into profits after the acquisition, then everyone will benefit.

Bottom line

Although there are many forms of leveraged buyouts that can lead to large-scale layoffs and asset sales, some leveraged buyouts can be part of a long-term plan to rescue companies through leveraged buyouts. No matter what they are called or how they are described, as long as there are companies, potential buyers and loans, they will always be part of the economy.


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