JAB Holdings acquired Krispy Kreme Doughnuts through an LBO in 2016. Image Credit: Neil T (CC by SA-2.0)
A leveraged buyout (LBO) is a tactic used by a company to acquire another company through the use of large amounts of borrowed money. Often in an LBO the assets of the target company make up a large portion of the collateral put forward for the loans needed to buy it. In this way, LBOs allow companies to make large acquisitions without risking their own capital.
Leveraged buyouts are not always sanctioned by the target company, making them potentially a form of hostile takeover. The loans used to conduct the buyout may have high interest rates, as occurred with infamous LBOs of the 1980s. If the acquiring company cannot pay off the loans, it is often the acquired company that suffers. LBOs are also sometimes frowned upon because they use a target company’s success in assets against itself.
However, there are several useful reasons a leveraged buyout might occur under more voluntary terms. LBOs can be used to take a public company private, or to spin-off a portion of an existing business. They can also be used during changes in small business ownership to transfer private property. All of these scenarios rely on the acquired company to be profitable and growing.
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