Leveraged Buyout

Definition: Leveraged buyouts are essentially takeovers that involve using lots of borrowed money.  These were made famous in the 1980's when corporate raiders would issue junk bonds, buy a conglomerate that was mismanaged, and sell of its parts.

Advice: LBO's can make money in two ways:

1.) Buy the company and sell off its pieces, then repay the debts.  If the value of the pieces is greater than the business as a whole, the buyer makes a profit.
2.) Buy the company and manage it more efficiently.  As long as the company can be managed so that it generates enough cash flow to pay the interest on bonds, the buyer will profit.