Leveraged Buyouts (LBO) in private equity deals

Seminar paper from the year 2007 in the subject Business economics - Investment and Finance grade: 13 European Business School - International University Schloß Reichartshausen Oestrich-Winkel course: Corporate Finance language: English abstract: Igniting in 2005 the discussion about highly leveraged transactions conducted by financial institutions became a matter of great controversy in German politics as well as in the media. Fuelled by an influential voice in politics LBO firms became the face of capitalism's evil by calling them a Heuschrecke an animal much feared in history for its exploitive behaviour and risks to the mediaeval agrarian economy (Die Zeit 2005). In terms of today's Heuschrecke according to public voice downsizing and raidingrepresent the major risks attributed. Empirics show that the risk of downsizing in LBOs is falsified and that the occurrence of raids is rather irrelevant in today's buyout universe. However even if both risks heldeach would exhibit a comparably low impact on the economy as a whole. Contrary the empirically evident high-impact risk of over-indebtedness in leveragedtransactions is widely neglected. The negligence of this risk-issue is dangerous particularly with regard to the recent developments in the LBO industry debt capital markets and the world's economy. First analysing the latest LBOs conducted it appearsthat the historical failures such as the buyouts of Revco and RJR Narbisco are widely forgotten as gearing ratios have become aggressive again. Second the subprime crisis which was exported from the US real estate sector into global capital markets causedliquidity shortages - AA rated banks were not willing to lend money to their equally rated peers anymore - which led to a credit crisis. This credit crunch provoked that even though in the US the prime rate has been reduced by 50 bp and in the Eurozonethe prime rate was not increased as planed 'money became expensive'; FIBOR LI