What is a LBO?

Leveraged buyout, also known as financing mergers and acquisitions, debt-based business acquisitions, is a corporate financial instrument. Refers to the strategy of a company or individual using the assets of the acquisition target as a mortgage on the debt to acquire the company. The main body of a leveraged buyout is generally a professional financial investment company. The purpose of an investment company's acquisition of a target company is to buy the company at an appropriate price, increase the value of the company through operations, and increase investment income through financial leverage. Usually investment companies only pay a small part of their money, and most of the funds come from bank mortgage loans, institutional loans, and issuance of junk bonds (high interest rate and high risk bonds). Pay interest. If the acquisition is successful and the expected benefits are obtained, the lender cannot share the gains from the appreciation of the company's assets (unless there is a debt-to-equity agreement). During the operation, a bridge loan may be arranged as short-term financing, and then the acquisition is completed by borrowing (borrowing or borrowing money). Leveraged buyouts in foreign countries often involve a large number of junk bonds issued by the acquired company to establish a new company with highly concentrated equity and highly leveraged financial structure. In China, because junk bonds have not yet arisen, the acquirers mostly use the equity of the acquired company as a pledge to borrow from banks to complete the acquisition.

LBO

Leveraged buyout, also known as financing mergers and acquisitions, debt-based business acquisitions, is a corporate financial instrument. Refers to the strategy of a company or individual using the assets of the acquisition target as a mortgage on the debt to acquire the company. The main body of a leveraged buyout is generally a professional financial investment company. The purpose of an investment company's acquisition of a target company is to buy the company at a suitable price, to increase the value of the company through management, and to pass

The typical advantages of a leveraged buyout method are:

Assets or cash requirements for M & A projects are low.

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Criticism of leveraged buyouts has focused on M & A companies using the wealth of third parties to extract additional cash flow from target companies, such as the federal government. The acquired company enjoys payment of interest

U.S. RJR Nabisco scrambles

Speaking of leveraged buyouts, we must mention a leveraged buyout in the 1980s-the US RJR Nabisco company purchase. This transaction, known as the "Century Acquisition", shocked the world with a purchase price of $ 25 billion, and became the largest leveraged acquisition in history, making subsequent acquisitions unmatched.

This acquisition war is mainly between the senior management of RJR Nabesker and the well-known acquisition company KKR (Kohlberg Kravis Roberts & Co.), but due to its huge scale, there are many

The generalization of the radical financial style of Chinese enterprises also has some cultural roots. For a long time, we have advocated the winner as the king and the loser as the pirate. In many value evaluation systems, data are used to discuss heroes. The GDP-only theory of local governments and the performance-only theory of enterprises are based on results as the only measure, regardless of whether the results are consistent with the logic of economic development and whether they are a sustainable growth model. They do not even ask about the results. Whether it is moral and legal. In this atmosphere, in order to pursue beautiful figures, entrepreneurs always have the urge to quickly increase the size of the enterprise. Slogans such as "becoming one of the top 500 companies in five years" or "creating ** billion yuan companies in three to five years" have seen too many Chinese people in recent years, and the former is often brushed on corporate walls The latter is often found in the "governance framework" of the local government. Guided by these slogans and value evaluation standards, enterprises will inevitably be driven by short-term benefits, and extreme means will prevail, in order to quickly reach their goals.

In addition, some ills in the environment and economic system, as well as the power of some regulatory agencies to seek rent, often force companies to take risks. Over time, high-risk operations have become the norm in business operations. It is a psychological trap for entrepreneurs to comfort themselves and let go.

In addition, Chinese companies usually have a short history. Most companies lack corporate governance structures and internal control mechanisms, scientific decision-making procedures, and no quantitative decision-making capabilities. Their ability to judge, manage, and avoid risks is very weak. In some large state-owned enterprises, it is often the boss who has the final say, and in private enterprises, paternalism is more prevalent. It is not surprising that radical and even aggressive financial styles have become widespread in the event of internal control failure.

Indeed, if it catches up with the right place and time, radical financial measures will have a multiplier effect, and when the macroeconomic or market prospects face many uncertain factors, there will be greater risks. For example, some real estate companies in the past have achieved success through extremely aggressive financial measures in the early stages of development, so they have been overconfident and even obsessed with the magnanimous big-ticket sales. A well-known real estate company, relying on high debt management, has achieved great success at the beginning, but after the macroeconomic policy changes and the monetary tightening, its net asset-liability ratio of 140% to 160% is not a problem of shrinking profits It is the huge risk of a broken capital chain and even bankruptcy. The so-called success is also Xiao He, and defeat is also Xiao He.

Acquisition is when a company passes

Leveraged acquisitions must take into account the debt's ability to repay debts. With such a large amount of borrowed acquisition methods, sufficient confidence must be paid to repay debts and interest. Because the interest expense can be deducted from the pre-tax income, the tax burden can be reduced, so the actual value of the enterprise is much higher than the book value. The target companies of leveraged acquisitions are mostly those with high and stable cash flow generation capabilities, or those that sell or shut down part of the unprofitable business of the target company and can greatly reduce costs and increase profit margins after rectification. Because leveraged buyouts need to be completed through debt, the target company's own debt ratio must be low.

Leveraged acquisitions generally have MBO / MBI operations, that is, a new management layer may be formed, which may include the internal management of the target company and the introduction of management. On the one hand, many MBOs, MBIs, and IBOs are completed by leveraged buyouts; on the other hand, leveraged buyouts often involve the management team (LMBO). The difference between this LMBO and the general MBO is that the management team only takes a small part Shares, and institutional investors supporting transactions account for the vast majority of shares. After the completion of a leveraged buyout, managers' shareholding ratios will usually reach 20% to 30% in various ways. This will greatly increase the management's enthusiasm for operations, speed up cash flow and repay huge debts.

Leveraged acquisition can also be a small and medium-sized company with potential and management capabilities, with the help of an investment company to acquire a troubled large company or a listed company. The result of this operation is that the original acquisition subject company becomes a subsidiary of the acquired company, and at the same time the acquisition of the subject company acquires absolute control of the acquired company.

In the case of a small company merging a large company, the business or image of the merged company often occupies the main position in the new merged company. Small companies can leverage leveraged acquisitions to rapidly expand production scale or gain established market channels and brands, while acquired large companies rely on new management mechanisms or new technologies brought by small companies to gain new life. There are many examples of corporate restructuring by introducing new management mechanisms and funds in this way, so as to achieve high-speed growth or turn around. Investment companies that engage in this type of trading are investment experts who focus on restructuring or turning loss-making companies, so they have the ability to engage in complex transactions and manage headache management issues.

Leveraged acquisitions, as a new type of mergers and acquisitions, have obvious advantages and risks. Although it can greatly help enterprises in raising funds, increasing earnings per share, using incentive systems, and expanding business scale, especially the change in the mode of acquisition of funds for acquisitions, it has overcome the insufficient cash position in the traditional way. Bottlenecks, but at the same time the financial and operating risks that accompany them may at any time make the company face the risk of insolvency or even bankruptcy. Therefore, for the time being, not all state-owned enterprises are suitable for M & A through leveraged buyout.