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Leverage Buyouts

In the 1980s, leveraged buyouts (LBOs) were a popular form of acquisition. Under a leveraged buyout, a buyout group (which frequently includes target management) makes an offer to buy the target firm at a premium over its current price. The buyout group finances much of the acquisition with debt capital, leading the target to become a highly leveraged private company following the acquisition.
a. What types of firms would make ideal candidates for LBOs? Why?
b. How might the acquirer add sufficient value to the target to justify a high buyout premium?

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Leveraged buyout is a takeover or acquisition of the organization through debt. Thus debt is the prime source of funds which is used in leveraged buy out. Thus debt form majority of the funds for the acquisition. Currently they are very popular. The main motivation in LBOs is to increase wealth rapidly in short time. The following firms are generally the targets for LBOs:
1) High growth, high market share firms
2) High profit ...

Solution Summary

This solution provides an explanation for questions related to leveraged buyouts.