LEVERAGED BUYOUT MODEL Harvard Case Solution & Analysis

Leveraged Buyout Model

Leverage buyout is the acquisition of another company using significant amount of borrowed money to meet the acquisition cost. In most cases, the assets of the company being acquired are used as collateral for loans in addition to the assets of the acquiring company. The main purpose of leveraged buyouts is to allow the companies to acquire large companies without having to commit a lot of capital.

However, leverage buyouts have had a mix history with several prominent buyouts led to the bankruptcy of the acquired companies and the main reason behind the bankruptcy is the fact that the leverage ratio of those companies was nearly 100%. Moreover, due to non-payment of large interest amount, the companies were unable to meet the obligations.

There are plenty of advantages and disadvantages of leveraged buyouts. Due to the corporate restructuring from leveraged buyouts, this can affect the employees as it means companies might have to downsize their operations and also reduce the number of staff, which results in unemployment for those who will be laid off.However,this is becausethere is a positive aspect of leveraged buyout due to which the poorly managed firms prior to the acquisition can undergo valuable corporate reformation when they become private. Through restructuring a company can also revitalize itself and earn the substantial returns, which are also important in paying out the interest

Leveraged buyout involves high debt-to-equity ratio.This makes it easy for large organizations to acquire small companies with little capital and if the acquired company’s returns are greater than the cost of the debt financing, then due to this all shareholders can benefit from the financial returns and further increase the value of the firm. However,if the returns of the company are less than the cost of financing, then corporate bankruptcy is a possibility. Higher interest rates which are imposed by leveraged buyouts may be a challenge for companies whose cash-flow and sales of assets are insufficient.

It is very crucial that the economy is strong and remains solid because the leveraged buyout is very risky and strong economy can improve the chances for the success of the buyout. However, weak economy is an indicator of the problematic leveraged buyout. During the economic crisis, it can be difficult that money comes by and dollar weakness as this could also make acquiring companies lead to poor financial returns. The acquisition also has the ability to affect the morale of the employees and it could also increase the animosity against the acquiring corporation and can halt the growth of a company........................

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