Leveraged Buyouts (LBOs) are a gamble on the part of the acquiring company. The simple definition of this scenario is as such: An LBO tends to happen when one company buys out a target company whose interest rates are low, the company is underperforming, and/or the company is undervalued. The acquiring company can buyout these smaller companies, and essentially fund their efforts to continue. LBOs are also commonly known as hostile takeovers when the target company does not necessarily want the deal to go through. (Bacior, 2020)

However, there is a little confusion when it comes to the term’s ‘buyout’ & ‘merger’. One very recent example we can use to demonstrate this is the recent buyout of FOX by Disney in March of 2019. (SCHWARTZ, 2019) This deal is a little confusing because the labels ‘merger’ and ‘acquisition’ have both been used by many different news sources. The acquisition of a company through a leveraged buyout means purchasing an entity by taking over its assets. The acquiring company thereby has more influence on what direction everything goes. A merger refers to when two or more companies consolidate to form a new entity. In the case of Disney & Fox Entertainment, this would be an example of a horizontal merger.

An example of a leveraged buyout would be the Zell & Tribune Media buyout in 2007. Again, not all buyouts are done willingly, or with a solid plan. According to this deal, “Zell took Tribune private in an $8.2 billion buyout in December 2007 that saddled the Chicago-based owner of the Chicago Tribune, Los Angeles Times, Baltimore Sun and WGN superstation with too much debt.” Unfortunately for this business deal, “Tribune Media filed for bankruptcy in December 2008, one year after Chicago billionaire Zell took the company private in a heavily leveraged $8.2 billion deal.” (CHANNICK, 2019)

These examples show us the difference between these two different situations, and unfortunately, reveal the sad truth that can occur when dealing with LBOs. In the case of ‘Zell & Tribune Media’, “senior executives agreed to settle with the litigation trust for $200 million, according to a motion filed May 31.”

The scope of these business deals can sometimes be difficult for people to wrap their heads around, especially with the kinds of numbers that are often thrown around. Essentially, “The LBO model can work well — especially for private-equity firms — during booms. Boosted by an influx of cash, the newly private companies are revitalized and flipped in IPOs or strategic sales. But these deals can blow up in spectacular fashion when markets and economies crash.” (Egan, 2020) This all translates into a big gamble, which is what my initial thought was on these sorts of deals. When they work, they work really well. When they don’t, everything crashes in on itself very quickly and leaves people with massive amounts of debt, and many others searching for new jobs.

Personally, I do think LBOs have a beneficial place in our markets. When used with a proper vision, these can potentially turn a business around from the brink of going under. The past 20 years have been a pretty good example when it comes to the media. With the development of the internet and technology, businesses of all kinds have had to rethink their strategies. A buyout can be a good thing, for instance, if a company owner is too set in their ways to adapt to a changing market.

Bibliography

Bacior, M. (2020, Jan 20). What is a leveraged buyout or LBO? Retrieved from medium.com: https://medium.com/investify-media/what-is-a-leveraged-buyout-or-lbo-1fbf462db4d1

CHANNICK, R. (2019, June 14th). Ten years after Tribune Co. ‘deal from hell,’ Sam Zell and other former execs agree to pay $200M to settle leveraged buyout lawsuit. Retrieved from chicagotribune.com: https://www.chicagotribune.com/business/ct-biz-zell-tribune-buyout-lawsuit-settlement-20190613-story.html

Egan, M. (2020, June 29th). Risky deals boomed during the bull market. Now some are blowing up. Retrieved from cnn.com: https://www.cnn.com/2020/06/29/investing/bankruptcy-debt-private-equity-lbo/index.html

SCHWARTZ, M. S. (2019, March 20th). Disney Officially Owns 21st Century Fox. Retrieved from npr.org: https://www.npr.org/2019/03/20/705009029/disney-officially-owns-21st-century-fox#:~:text=Disney%2DFox%20Entertainment%20Merger%20Is%20Official%20In%20%2471.3%20Billion%20Deal%20%3A%20NPR&text=Live%20Sessions-,Disney%2DFox%20Entertainment%20Merger%20Is%20O