takeover of a company using the acquired firm's assets and cash flow to obtain financing. Typically, these transactions are done by conglomerates selling or spinning off an unwanted subsidiary to the company's managers and outside investors. The buyers of an LBO financing are said to take private the target company. Leveraged buyouts are risky for the buyers if the purchase is highly leveraged. An LBO can be protected from volatile interest rates by an interest rate swap, locking in a fixed interest rate, or an interest rate CAP, which prevents the borrowing cost from rising above a certain level. LBOs also have been financed with high-yield debt, or junk bonds and have also been done with the interest rate capped at a fixed level and interest costs above the cap added to the principal. For commercial banks, LBOs are attractive because these financings have large up-front fees. They also fill the gap in corporate lending created when large corporations begin using commercial paper and corporate bonds in place of bank loans.
takeover of a company, using borrowed funds. Most often, the target company's assets serve as security for the loans taken out by the acquiring firm, which repays the loan out of cash flow of the acquired company. Management may use this technique to retain control by converting a company from public to private. A group of investors may also borrow funds from banks, using their own assets as collateral, to take over another firm. In almost all leveraged buyouts, public shareholders receive a premium over the current market value for their shares. When a company that has gone private in a leveraged buyout offers shares to the public again, it is called a reverse leveraged buyout.
