Читать книгу Leveraged Buyouts - David Pilger - Страница 7

Why do a leveraged buyout? Why would anyone go through the trouble? The answer is quite simple: money. The goal of any LBO transaction is to achieve higher returns on the initial equity investment of the investor. Leveraged buyouts are designed to enhance the returns attainable by equity investors; they do so by decreasing the size of the initial equity investment.

“The goal of any LBO transaction is to achieve higher returns on the initial equity investment of the investor.”

For example, a company is purchased for $100 million with 100% equity and the company is streamlined over the course of a year and later sold for $110 million. The investor just made a 10% return on investment. (Let’s ignore the time value of money for now.)

Alternatively, if the investors were able to get a secured loan on the company’s assets for $90 million and made an initial equity investment of $10 million, they would still be able to purchase the $100 million company. They would have to pay interest expense on the loan, which happens to be 7% annually. After one year, the investors are able to sell the company for $110 million. With the proceeds from the sale of the company the investors do the following:

 pay down the $90 million loan

 pay $6.3 million in interest expense due.

After paying interest expense and paying back the loan, investors are left with approximately $13.7 million for themselves. That represents a return of about 37%, more than triple the return on equity of the 100% equity transaction!

The bottom line is that leveraged buyouts are about achieving greater returns on equity for investors.

While levered transactions present several advantages to investors, at the same time they bring significant risks. It is the ability of corporations to execute restructuring plans (post LBO) that determine whether a company can sufficiently handle the interest burden taken on as a result of the leveraged buyout and drive the earnings that determine whether greater returns on investment can be realized by investors.