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Leveraged Buyout Definition

What is a Leveraged Buyout?

A Brief Explanation of Leveraged Buyout | Definition

A leveraged buyout, or LBO, involves a business transaction where a private equity firm, or group of firms buy control of a target company using borrowed money. The agreement puts the new company in a large amount of debt and typically the target company will be recapitalized, or provided with more stock instead of debt. There are different types of debt including senior and mezzanine which both typically have a low cost of capital. The cash flows of the acquired firm will be used to repay the debt. The greater a firm leverages, or the more debt the firm takes on, the larger the return on the initial investment. Therefor, private equity firms are incentivized to leverage as much as possible. Perhaps the most famous leveraged buyout took place in 1988. Kohlberg Kravis Roberts & Co. (KKR) after a long bidding war bought out RJR Nabisco for $31.1 billion. The deal took the company private as KKR attempted to restructure the firm.

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