Leveraged buyout Definition
A leveraged buyout (or LBO) occurs when a financial sponsor gains control of a majority of a target company's equity through the use of borrowed money or debt. Typically this money is borrowed through a combination of prepayable bank facilities and/or public or privately-placed bonds, which may be classified as high-yield or junk bonds. Often, the financial sponsor will use the target company's free cash flow to repay the borrowed debt. Finally, the financial sponsor will sell the target company to another company, sell shares in an IPO or pay itself a dividend payment in a refinancing. Most leveraged buyout firms look to earn a return on investment in excess of 20%.
Proponents of LBOs claimed that they caused companies to make more efficient use of their resources. Opponents claimed that they tended to destroy value and cause great economic hardship through the economic disruptions they caused.