Leveraged Buyout (LBO)
The acquisition of a company using significant borrowed funds.
What is LBO?
A leveraged buyout (LBO) is the acquisition of a company using a significant proportion of borrowed money (debt), with the acquired company's assets and cash flows used as collateral and the source of debt repayment. Private equity firms typically provide the equity portion (20–40%) while banks and bond markets supply the debt (60–80%). The goal is to generate returns by improving the business operationally, reducing debt over time, and selling (exiting) the company at a higher multiple than the entry price. LBOs are most suitable for companies with stable, predictable cash flows.
Example
KKR's $25 billion buyout of RJR Nabisco in 1989 used roughly $23 billion in debt — about 93% leverage. The company's stable tobacco and food cash flows were used to service the debt load.
Source: Investopedia — Leveraged Buyout