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CA Final · Advanced Financial Management · Mergers, Acquisitions and Corporate Restructuring

Which statement best describes a leveraged buyout (LBO)?

A leveraged buyout is an acquisition financed largely by borrowed money, where the target's assets and future cash flows secure the debt and fund its repayment. The high debt share is what distinguishes it from share-swap or equity-funded acquisitions.

  1. AAcquisition of a company mainly financed by borrowed funds, with the target's assets and cash flows serving as security and repayment sourceCorrect
  2. BAcquisition paid for entirely by issuing new equity shares of the acquirer to the target's shareholders
  3. CMerger of two companies in the same line of business with no external financing
  4. DSale of a division to its parent company at book value

Explanation

An LBO uses a high proportion of debt to buy a company, and the debt is serviced from the target's own cash flows and secured on its assets. An all-equity share-swap acquisition has no leverage, so it is not an LBO.

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