How to eat a big fish – Leveraged Buyouts

Leveraged buyouts are an example of how main-street business is ironic and funny at times.

Consider a small company A and a big company B. Let’s say B is 10 times bigger than A. Can A buy B? Or, to make It more interesting, Can A buy B when it has only 10% cash of what is the total selling price of company B?

The answer could be ‘Yes’ when we consider the possible use of Leveraged Buyouts. Company B needs to do the following:

1, convince majority shareholders of company A to sell their shares to Company B. (And maybe start chilling in Maldives)

2, ask their bankers to arrange a leverage buyout of all the shares of company A. (Where the bankers will give a loan to company B equal to 90% of selling price of Company A, secured on assets of Company A.)  Waaa? Yes, such is the magic of LBOs (leverage buy outs). The predator (company B) uses the assets of the prey (company A) against itself.

Thus, LBOs teach us two important lessons:

1, small fish can eat big fish if they make a strong plan

2, being big is not always safe. You are visible and become easy target. Like the elephant of Thailand which is hunted for its biggest asset : its tusks.

#smarts

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Categories: #education, #finance, Ideas

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