Leveraged buyout

A leveraged buyout (or LBO) occurs when an entity is able to control a majority of shares by using borrowed money. Typically this money is borrowed through the issuance of junk bonds.

Proponents of LBOs claimed that they caused companies to make more efficient use of their resources. Opponents claimed that they tended to destroy value and cause great economic hardship through the economic disruptions they caused.

This strategy was widely used in the 1980s, with both success and dramatic failure. A very well-known LBO was the purchase of Nabisco by Kohlberg, Kravis, and Roberts as chronicled in the book Barbarians at the Gate.

Many LBOs resulted in corporate bankruptcy, such as the one for Federated Department Stores. This occurred when the acquirer miscalculated the potential value of the buyout. Furthermore, companies adopted a number of financial techniques, such as the poison pill which protected them against hostile takeovers. These measures caused the use of LBOs as a financing tool declined during the 1990s.

A person who had insider knowledge as to whether a merger was about to succeed or fail could illegally use this knowledge to make a large amount of money through insider trader, a practice which ultimately caused people such as Michael Milken and Ivan Boesky to end up in jail.