Leveraged buyout

[3] Since the early 2000s, the debt-to-equity ratio in leveraged buyouts has declined significantly, resulting in increased focus on operational improvements and follow-on M&A activity to generate attractive returns.

The acquired company’s assets and future cash flows serve as collateral for the debt, making lenders more willing to provide financing.

[1] While different firms pursue different strategies, there are some characteristics that hold true across many types of leveraged buyouts: Debt volumes of up to 100% of a purchase price have been provided to companies with very stable and secured cash flows, such as real estate portfolios with rental income secured by long-term rental agreements.

Financial sponsors often find MBOs to be attractive situations as they have the opportunity to align itself with an insider who may have unique perspectives on the company and potential areas of operational improvement.

A secondary buyout will often provide a realization event for the selling private equity owner(s) and its limited partner investors.

These investment vehicles would utilize a number of the same tactics and target the same type of companies as more traditional leveraged buyouts and in many ways could be considered a forerunner of the later private-equity firms.

"[22] The leveraged buyout boom of the 1980s was conceived in the 1960s by a number of corporate financiers, most notably Jerome Kohlberg, Jr. and later his protégé Henry Kravis.

[24] The success of the Gibson Greetings investment attracted the attention of the wider media to the nascent boom in leveraged buyouts.

[26] In the summer of 1984 the LBO was a target for virulent criticism by Paul Volcker, then chairman of the Federal Reserve, by John S.R.

Among the most notable investors to be labeled corporate raiders in the 1980s included Carl Icahn, Victor Posner, Nelson Peltz, Robert M. Bass, T. Boone Pickens, Harold Clark Simmons, Kirk Kerkorian, Sir James Goldsmith, Saul Steinberg and Asher Edelman.

[28][29] Many of the corporate raiders were onetime clients of Michael Milken, whose investment banking firm, Drexel Burnham Lambert helped raise blind pools of capital with which corporate raiders could make a legitimate attempt to take over a company and provided high-yield debt financing of the buyouts.

Many of the major banking players of the day, including Morgan Stanley, Goldman Sachs, Salomon Brothers, and Merrill Lynch were actively involved in advising and financing the parties.

KKR's final bid of $109, while a lower dollar figure, was ultimately accepted by the board of directors of RJR Nabisco.

Additionally, the RJR Nabisco deal was showing signs of strain, leading to a recapitalization in 1990 that involved the contribution of $1.7 billion of new equity from KKR.

[34] Drexel Burnham Lambert was the investment bank most responsible for the boom in private equity during the 1980s due to its leadership in the issuance of high-yield debt.

[37] The combination of decreasing interest rates, loosening lending standards, and regulatory changes for publicly traded companies (specifically the Sarbanes–Oxley Act) would set the stage for the largest boom the private equity industry had seen.

[43] Additionally, U.S.-based private-equity firms raised $215.4 billion in investor commitments to 322 funds, surpassing the previous record set in 2000 by 22% and 33% higher than the 2005 fundraising total.

The failure of the Federated buyout was a result of excessive debt financing, comprising about 97% of the total consideration, which led to large interest payments that exceeded the company's operating cash flow.

Many LBOs of the boom period 2005–2007 were also financed with too high a debt burden, however default rates were significantly below the expectations of market observers given the proximate onset of the 2008 global financial crisis.

Some courts have found that in certain situations, LBO debt constitutes a fraudulent transfer under U.S. insolvency law if it is determined to be the cause of the acquired firm's failure.

[56] In 2009, the U.S. Court of Appeals for the Sixth Circuit held that such settlement payments could not be avoided, irrespective of whether they occurred in an LBO of a public or private company.

[57] To the extent that public shareholders are protected, insiders and secured lenders become the primary targets of fraudulent transfer actions.

The financial restructuring might entail that the equity owners inject some more money in the company and the lenders waive parts of their claims.

Nonetheless, the financial restructuring requires significant management attention and may lead to customers losing faith in the company.