A leveraged buyout (LBO) is a financial transaction in which a company is acquired using a significant amount of borrowed funds to meet the cost of acquisition. The assets of the acquired company, along with those of the acquiring entity, are often used as collateral for the loans. This strategy allows investors to make large acquisitions without committing a lot of their own capital.

Characteristics:
– High Debt Levels: LBOs typically involve a large amount of debt, often exceeding 70% of the purchase price.
– Cash Flow Focus: The acquired company’s cash flow is crucial, as it is used to service the debt and fund operations.
– Equity Contribution: The acquiring firm usually contributes a smaller portion of equity, which can be from private equity firms or management teams.
– Operational Improvements: Post-acquisition, there is often a focus on improving the company’s operations and profitability to increase cash flow.
– Exit Strategy: Investors typically plan for an exit strategy, such as selling the company or taking it public, within a few years.

Examples:
– Kraft Foods and Heinz: In 2015, 3G Capital and Berkshire Hathaway used a leveraged buyout to merge Kraft Foods with Heinz, creating a major food company.
– Dell Technologies: In 2013, Michael Dell partnered with Silver Lake Partners to take Dell private in a leveraged buyout, aiming to transform the company away from public market pressures.
– Toys “R” Us: The toy retailer was taken private in a leveraged buyout in 2005, which ultimately led to significant debt challenges and its bankruptcy in 2017.