What's a Leveraged Buyout... in English please : ) ?

Be like Nutella

What's a Leveraged Buyout... in English please : ) ?

Am I right when I think of an LBO in the following terms?

You approach company A who has decent cash flow but for various other reasons is in serious financial trouble and you propose to take them over and fix their problems.

You do this by raising money using an investment bank by going to that bank with a few million (as a down payment) and asking them to loan you a far greater sum (say 8 times as much for instance.. just like a 90% mortgage).

You take this cash and you buyout Company A and in doing so become members of their board (CEO whatever you like) or majority shareholder with powerful voting rights etc and you sign all that bank debt on to Company A's books using the company itself as the collateral for the 'mortgage' with the investment bank who gave you the huge sum to buy that company?? Am I there yet? (like some Dublin developers:)

At the same time as running the company or playing a large role in the company itself you also charge that company consultant/management fees because you're supposedly helping them improve their financial standing... these fees are typically in the millions of dollars.

Because you have now bought over the company by raising money from a bank and then signed over that debt to Company A which you bought, you have now saddled company A with the 100 million in debt or whatever it was.

As a result Company A is now under pressure to get its house in order and it's costs down extremely quickly i.e. almost from day 1.. sufficient to pay the loan payments that the bank will of course want back.

That would imply the necessity to drastically lower costs as a result NOT from any original business model problems or sales performance issues but entirely and specifically as a result of the original buyout loan.

This can/does result in the wholesale firing of large numbers of staff essentially by an outside management team who are driven to earn their management fees primarily as opposed to act benevolently for the company stakeholders one of which is of course the employees. This can cause huge problems within Company A as one would expect so you, as the LBO team, pay off the 'problem' managers by voting them huge one-off bonuses from the board you control which smooths over any restrictive problems which occur during the slash'n'burn process.

IF it doesn't work out i.e. if the cost cutting measures do not have the desired results of turning the company around and increasing profit and increasing the general financial health of the company then Company A can go under of course but the LBO management team have nothing to worry about personally because they are not vulnerable to any negative results, in that they will have extracted their management fees which Company A signed up for, AND the debt which has strangled Company A which was put on to their books by that LBO management team is now owed ENTIRELY by Company A. Then the LBO team walk away with their millions in fees after possibly directly causing huge lay-offs and the financial destruction of a company which may have existed for a century and all the unemployment related destruction that would entail.

Is this far off base? or am I right in thinking this is a classic predatory LBO hypothetical story? Or is it slanted and biased against the LBO firm so much as to be an unlikely story? I just want an understanding of the 'Typical' Leveraged Buyout process as it is in reality and not as Democrats would necessarily have you believe that Bain capital engaged in for decades under the leadership of Mitt Romney.

Neutral apolitical economic opinions welcomed.

Cheers.

Kylo Ren

In it's simplest term a 'Leveraged Buyout is the purchase of another company using significant amounts of borrowed money. It allows businesses make large purchases without putting up huge sums of capital. It's how the Glazers purchased Manchester United in 2005.

Stinicker

A fine example would how the different vultures destroyed Eircom. It usually doesn't end well.