Home › Finance › Mergers & Acquisitions › Leveraged buyout

Leveraged buyout

LEV-uh-rijd BY-owt /ˈlɛvərɪdʒd ˈbaɪˌaʊt/

nounC2GMATTOEFL

formalbusinessfinance

The acquisition of a controlling share in a company by an outside investor, financed by a significant amount of borrowed money, often secured by the target company's own assets.

Characterized by high debt-to-equity ratios. The acquired company's cash flow is often used to pay down the debt. It's a high-risk, high-reward strategy.

The story behind the word. The term 'leveraged buyout' is a modern financial compound. 'Leveraged' comes from 'leverage,' which refers to the use of borrowed capital to increase the potential return of an investment, much like a physical lever amplifies force. 'Buyout' simply means purchasing a controlling stake. So, it's a 'buyout' that uses the 'leverage' of significant debt to make the deal happen.

Word relationships

Debt-financed acquisition: A descriptive phrase, but 'leveraged buyout' is the specific, recognized term.
Highly-leveraged acquisition: Emphasizes the high debt, but 'leveraged buyout' is the standard terminology.

Cash acquisition: An acquisition financed entirely by cash, without debt.
Equity financing: Funding through the sale of ownership shares, not debt.

Commonly confused with

Management buyout (MBO): An MBO is when existing management buys the company. An LBO is about the financing structure (high debt), which can be an MBO or by an external firm.

Word family

leverage (verb): To use (something) to maximum advantage; to use borrowed capital for an investment.

Collocations

successful leveraged buyout
failed leveraged buyout
private equity leveraged buyout
debt-financed leveraged buyout

Example sentences

"The private equity firm specialized in leveraged buyouts, identifying undervalued companies and restructuring them for a profitable resale." Discussing private equity strategies.
"Critics argued that the leveraged buyout burdened the company with too much debt, making it vulnerable to economic downturns." Reporting on a financial transaction.

Memory hook

A 'LEVERAGED' buyout uses a 'LEVER' of debt to 'BUY OUT' a company. LEVERAGE debt to BUY.

When not to use

Do not use 'leveraged buyout' for an acquisition financed primarily by the buyer's own cash or equity, or for a small personal purchase. It specifically refers to a corporate acquisition with substantial debt.

Fun facts

The largest leveraged buyout in history was the acquisition of TXU Corp. (now Energy Future Holdings) in 2007 for approximately $45 billion.

Related words

Buyout, Acquisition

Explore more words

leverage, consortium, Hedge, Hedging, Ponzi scheme, venture