A leveraged buyout occurs when a company acquires another company using a significant amount of borrowed money. The purpose of leveraged buyouts is that it allows companies to make major acquisitions without having to commit major capital. The company making the leveraged buyout will sometimes use assets from the acquired company as additional collateral on the loan. The rationale for a leveraged buyout is that financing a buyout through leverage creates potentially higher returns. Also, because income flowing to equity is taxed but interest payment toward debt are not taxed, the company making the buyout is able to pay a higher price.
There are some qualities that make a company more prone to a leveraged buyout:
- Hard assets (used as collateral)
- Minimal existing debt loans
- Good history of consistent cash flows
- Prime opportunities for increasing cash flows from operational changes
- Temporary market conditions reducing share price
Link to This Resource: Leveraged Buyout
http://privateequityblogger.com/2008/06/leveraged-buyout.html