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by nn_77

LBO: Leveraged Buyout


Yesterday’s Nikkei News paper reported that the amount of loan provided for LBO projects has been increasing in the world. According to the statistics given in the article, the amount of such loan in 2006 was 360 billion dollars, 68% higher than the amount in the previous year. Large portion of money is provided to those buy-out funds, which are investment funds that earn most parts of their profits through M&A projects.

I didn’t learn the term LBO in the course of my BEC (Business Environment and Law) study in USCPA exam preparation. But, considering the popularity of the term on the NIKKEI news paper (the leading economic newspaper), it could be said it’s worth noting LBO here on my blog.

LBO is the abbreviation of Leveraged Buyout. Under LBO, an acquiring company raises money to buy another company by collateralizing the asset of the company to be acquired. In some cases, at the point of acquisition, an acquiring company doesn’t have much cash for acquisition and so an acquiring company often borrows money from financing corporations, which requires collateral assets to secure their loan. Thus, an acquiring company that doesn’t have either cash or assets to collateralize faces difficulty in acquisition. In LBO, however, an acquiring company can borrow money by collateralizing the asset of the company to be acquired. The LBO scheme, therefore, makes it possible for an acquiring company to acquire another company with little cash of its own, and this is the very effect that is compared to the principle of leverage.
by nn_77 | 2007-06-21 16:28 | >BEC | Comments(2)