# Understanding Leveraged Buyouts (LBOs): Fundamentals and Examples

## What Is a Leveraged Buyout?

A leveraged buyout (LBO) involves one company acquiring another by financing most of the purchase through borrowed funds, typically by issuing bonds or securing loans. In this process, the company being acquired often has its assets used as collateral, alongside those of the acquiring company.

LBOs enable companies to make substantial acquisitions while preserving their capital, relying instead on the expected cash flows of the acquired firm to repay the debt. Noteworthy examples include the 2006 acquisition of Hospital Corp. of America and the 2021 Medline buyout, highlighting the resurgence of large-scale LBOs in the early 2020s.

### Key Takeaways

*   A leveraged buyout (LBO) involves acquiring a company primarily through borrowed funds, often using the target company's assets as collateral.
*   LBOs gained notoriety for being seen as aggressive, as they may impose swift cost-cutting measures and utilize the acquired company's assets against it.
*   These transactions allow businesses to make significant acquisitions without using a vast amount of their capital, aiming for high returns within a few years.
*   Successful LBO targets are typically established businesses with strong cash flows, reputable management teams, and opportunities for operational improvement.
*   After the 2008 financial crisis, LBOs briefly declined but regained momentum post-COVID-19, indicating resilient investor interest.

![Leveraged Buyout](https://www.investopedia.com/thmb/9DaEaQsxtjFfUIXeHCt628QFkGI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Leveraged-Buyout-V2-e108bff825ab4892afd2f22c7aa7b088.jpg)

*— Investopedia / Matthew Collins*

## How Leveraged Buyouts (LBOs) Operate  

In an LBO, the debt-to-equity ratio for the takeover is often maximized. The amount of debt used depends on market conditions, investor interest, and the company's expected cash flow after the takeover. The bonds issued in the buyout usually aren't investment grade and are referred to as [junk bonds](https://www.investopedia.com/terms/j/junkbond.asp) because of this high [debt/equity ratio](https://www.investopedia.com/terms/d/debtequityratio.asp).

> **Important**
>
> The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

Returns are generated in an LBO in three ways:

*   The company pays down its debt and this deleveraging increases the amount of equity in the company.
*   Investors are able to improve profit margins by reducing or eliminating unnecessary expenditures and improving sales.
*   The company will be sold at the end of the investment period at a higher multiple than the investment company paid, a process called margin expansion.

Private equity investment groups that carry out LBOs have garnered a reputation for being ruthless and predatory because of their need to rapidly increase margins. To do this, many investors embark on strict cost-cutting measures that can include making staff redundant.

To make their returns, the private equity investors have to sell or realize their investment over a relatively short timeframe. LBO investments are generally held for 5 to 7 years, but the period can vary.

There are several ways the investment can be realized:

*   Taking the [private](https://www.investopedia.com/terms/g/going-private.asp) company public
*   Selling to a competitor
*   Undergoing another round of private investment with a second LBO

Usually, LBOs are undertaken because a private equity investment group have identified the company as a good target. A good target can generate annual returns over 20%, allowing it to pay down debt and improve margins and multiples.

## Notable Leveraged Buyout Examples

One of the [largest LBOs on record](https://www.investopedia.com/ask/answers/050415/what-are-some-examples-successfully-executed-leveraged-buyouts.asp) was the acquisition of Hospital Corp. of America (HCA) by Kohlberg Kravis Roberts & Co. (KKR), Bain & Co., and Merrill Lynch in 2006. The three companies valued HCA at around $33 billion.

The number of such large acquisitions declined following the [2008 financial crisis](https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp) but large-scale LBOs began to rise again as the COVID-19 pandemic waned. A group of financiers led by Blackstone Group announced a leveraged buyout of Medline that valued the medical equipment manufacturer at $34 billion in 2021.

Vista Equity Partners and Elliott Investment Management entered into the first significant leveraged buyout of 2022 when they acquired Citrix Systems, Inc., a software manufacturer, for $13 billion in January.  

Yahoo! Finance reported in December 2023 that leveraged loans are on track for another boom year in 2024.  

## What Are the Mechanics of Leveraged Buyouts?

A leveraged buyout (LBO) occurs when one company attempts to buy another by borrowing a large amount of money to finance the acquisition. The acquiring company issues bonds against the combined assets of the two companies so the assets of the acquired company can be used as collateral against it.

Large LBOs have resurged in the early 2020s, though they're often seen as predatory or hostile.

## What Are the Reasons Behind Leveraged Buyouts?

Leveraged buyouts (LBOs) are commonly used to make a public company private or to spin off a portion of an existing business by selling it. They can also be used to transfer private property such as a change in small business ownership. The main advantage of a leveraged buyout is that the acquiring company can purchase a much larger company, leveraging a relatively small portion of its own assets.

## How Can You Identify Ideal Leveraged Buyout Candidates?

Equity firms usually target mature companies in stable industries for LBOs, not new or speculative ones. The best candidates for LBOs have historically had strong, dependable operating cash flows, well-established product lines, strong management teams, and viable [exit strategies](https://www.investopedia.com/terms/e/exitstrategy.asp) so that the acquirer can realize gains.

## The Bottom Line

A leveraged buyout (LBO) refers to the process of one company acquiring another using mostly borrowed funds to carry out the transaction. Firms often carry out LBOs to take a company private or to spin off part of an existing business.

Leveraged buyouts are often seen as a predatory business tactic because the target company has little control over approving the deal and its own assets can be used as leverage against it. LBOs declined following the 2008 financial crisis but have seen increased activity since then.

> **Article Sources**
>
> 1.  Leonard N. Stern School of Business, New York University. "[Corporate Restructuring](https://pages.stern.nyu.edu/~ealtman/5-%20Restructuring&Theory.pdf)." Page 34.
>     
> 2.  HCA Healthcare. “[HCA Completes Merger with Private Investor Group](https://investor.hcahealthcare.com/news/news-details/2006/HCA-Completes-Merger-With-Private-Investor-Group/default.aspx).”
>     
> 3.  Blackstone. “[Blackstone, Carlyle and Hellman & Friedman to Invest in Medline](https://www.blackstone.com/press-releases/article/blackstone-carlyle-and-hellman-friedman-to-invest-in-medline/).”
>     
> 4.  Financial Times. “[Private Equity Group Reaches Deal to Buy Medline for $34bn](https://www.ft.com/content/3993dcba-4cbc-4564-a22e-8c36992589b2).”
>     
> 5.  Los Angeles Times. "[Citrix Sells for $13 Billion in 2022's First Big Leveraged Buyout](https://www.latimes.com/business/story/2022-01-31/citrix-elliott-vista)."
>     
> 6.  Yahoo! Finance. "[2024 US Leveraged Loan Outlook: Strong Returns, Improved Issuance Likely](https://finance.yahoo.com/news/2024-us-leveraged-loan-outlook-000000564.html)."
>     
> 7.  S&P Global Market Intelligence. "[As LBOs Surged in Q4'20, US Purchase Price Multiples Hit New Heights](https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/as-lbos-surged-in-q4-20-us-purchase-price-multiples-hit-new-heights-62227223)."
>     
> 8.  Business Insider. “[How Private Equity Firms Screen for LBO Candidates](https://www.businessinsider.com/how-private-equity-screens-for-lbo-candidates-2011-10).”