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

Which statement best describes a leveraged buyout (LBO) as taught in corporate restructuring?

A leveraged buyout is an acquisition funded mostly with borrowed money, where the target's own assets and future cash flows secure and service the debt. The buyer contributes a small equity share, so leverage is high, unlike share-swap or equity-funded takeovers.

  1. AAcquisition of a company financed mainly by borrowed funds, with the target's assets and cash flows serving as security for the debtCorrect
  2. BAcquisition financed entirely by issuing fresh equity shares of the acquirer to the target's shareholders
  3. CMerger of two companies in which the acquirer's shareholders receive no consideration
  4. DSale of a division by a company to its own existing shareholders for cash at book value

Explanation

In an LBO a large part of the purchase price is raised through debt, secured on the target's assets and serviced from its cash flows. Option 1 describes an equity-funded share-swap deal, which is the opposite of high leverage. The other options do not describe debt-financed acquisition.

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