Leveraged Buyout Definition and What it Means Today


A leveraged buyout or "LBO" is a term made popular in the 1980s to describe acquisition transactions where the assets of the seller are used to finance the majority of the purchase price. The leveraged buyout definition has expanded over the years to include small businesses as well as big ones. In the 1980s the phenomenon was just becoming accepted by banks and there was more more common Wall Street than elsewhere. Moreover, Michael Milken the junk bond financier from Drexel Burnham Lambert popularized the technique by engineering numerous high profile LBOs which made the LBOs legendary.

Towards the late 1980s and after the 1987 acquisition by KKR of RJR / Nabisco, a $ 25 Billion deal and the largest at the time, the LBO phenomenon lost some of its momentum, in part because of the slipping economy following the Reagan years. At the same time, in 1990, Drexel had gone into bankruptcy due to the crash of the junk bond market as well as their well publicized securities law violations. Michael Milken would later go to prison for securities fraud and insider trading as a result of infringements during his huge string of transactions, both LBO's and other junk bond financings, during the decade.

In the 1990s bank loan portfolios had been ravaged due to both the economy and what was perceived as an overabundance of HLTs or highly leveraged transactions. In the final analysis, however, LBOs themselves were often structured with adequate protection and did not contribute significantly to bank loan losses.
Because of the accepted liability of LBO techniques, the phenomenon is quite alive and well today despite not running at the fever pitch of the 1980's. It should be noted, however, that Banks' positive stance towards LBOs, although somewhat more conservative than in prior decades, has led to the current plethora of private equity firms that deploy the techniques routinely.

This continued presence of the LBO culture is great for the small business buyer since a modestly small business or even individual can complete an LBO under the right circumstances. Banks have, over the last 20-30 years, been accustomed to participating in both small and large LBO's. The broad acceptance of the LBO enables the average businessman to take advantage of the technique and approach banks successfully for buyout financing. The fact is LBO's done on a small scale all the time and are one of the most effective ways for individuals to build wealth quickly.

Rockwell Marsh