Question: 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?