Leveraged buyout

A leveraged buyout is an acquisition financed largely with borrowed money, with the acquired company’s assets or cash flows supporting the debt. The buyer aims to repay that debt from the company’s future cash generation or sale proceeds.

Capital structure: The mix of debt and equity used to finance a company. An LBO replaces much of the target’s financing with debt and sponsor equity.
Private equity: Investment in companies that are not publicly traded, often through funds that acquire and later sell businesses. Private-equity firms are the most common sponsors of leveraged buyouts.
Management buy-in: An acquisition in which an outside management team buys a company and takes over its leadership. Unlike an MBO, a management buy-in brings in an external leadership team.
Financial distress: A condition in which a company struggles to meet its financial obligations. High LBO debt can make a business vulnerable when earnings or cash flow fall.
RJR Nabisco buyout: The 1989 acquisition of RJR Nabisco by Kohlberg Kravis Roberts, then the largest leveraged buyout on record. Its highly publicized bidding contest became a defining example of 1980s LBOs.
Senior debt: Borrowed money with priority over other debt claims in repayment and often security over assets. Senior loans usually form the largest, least costly part of LBO financing.
Take-private transaction: A transaction that removes a public company’s shares from a stock exchange and private ownership follows. An LBO can fund a take-private, ending public-market ownership and reporting.
All-cash acquisition: An acquisition paid entirely with cash rather than with a combination of cash and securities. An all-cash purchase avoids the heavy borrowing characteristic of an LBO.
Bankruptcy: A legal process for resolving debts when a person or organization cannot pay creditors. An overleveraged company may enter bankruptcy if it cannot refinance or repay its debt.
HCA buyout: The 2006 take-private acquisition of hospital operator HCA by a group of private-equity firms and company founders. The deal demonstrated the scale of modern sponsor-led buyouts.

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