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Incidentally, Does anyone have a good resource for understanding leveraged buyouts and how they work? I understand that this broadly means funding the acquisiti
by netsp 17y ago
Incidentally, Does anyone have a good resource for understanding leveraged buyouts and how they work? I understand that this broadly means funding the acquisition of a company by placing the debt on the target company's balance sheet but every explanation I have read just leaves too many obvious holes: The goal is to buy a company for $100m and sell it for $500m. (why does such a gap exist and why are private equity funds the only ones jumping on it?) or Instead of taking on the equity themselves, the fund will place this debt on the target company's balance sheet, not its own and statements like target companies often have strong cash flow that can be used to service the loan (How does a company worth $100m take on $500m in debt without going bankrupt? If it can do this [I assume they would be paying very junk bond rates of 20% or so], that means that they could have paid that amount in dividends to the owners instead and should be worth a lot more then purchase price.)
It reminds me of those hack video by Guy Kiyosaki about how rich people print money: I create a company and invest $10,000 in it. At $0.01 per share that is 1,000,00 share. Then I take the company to IPO and sell the shares for $1-$2 each. He then explains the math on whiteboard. $10,000 /0.01 * $1 - $10,000 = $990,000. Wow! This guy is one smart cookie.
In any case, if you know any books, articles etc. that will make a dim person like me understand, please tell.
- aaronblohowiak 17y agoMany companies are "under-leveraged". The example you gave is just an extreme. If borrowing a ton of money means you can build new factories / expand product lines / take on new markets, then it might put you in the red for a little while to service the debt, but over time those capital expenditures will pay themselves off. You don't take out one $500m loan, you leverage yourself in many different ways to maximize the cash you can get out of it (with the rates you pay on it increasing over time.) Also note that large companies that lose some money are "worth more" than smaller companies that make a little.
- netsp 17y agoWhat you are describing is just normal financing. IE using debt or equity to fund additional business activities. My understanding of a leveraged buyout is that it usually means: Buying a company using its own balance sheet. Borrowing at a high rate. Paying back the loan using the companies own cash flow. Selling the debt-ridden company off. I feel like I am missing something. If it can service these massive loans, why isn't it worth more? How does it become worth more after taking on this (expensive) debt? If the company is so under financed that junk bond rate debt is going to be well worth it, any form of financing should do. Why would you need a private equity fund to do that? I never hear private equity funds described as "experts at finding under financed companies and growing them to full potential."