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By Lisa Meulbroek
A buy-out is the
acquisition by a small
investor
group or private equity partnership of stock or assets of a target
company.
Buy-outs are financed largely with debt, and tend to be associated with
operational improvements. This article discusses the type of businesses
that undergo buy-outs, the financial structure of a buy-out, and the
role
and structure of the buy-out or venture capital firm that structures
the
deal.
The primary candidates for
buy-outs are
- subsidiaries
of parents companies
(either local or
foreign parents)
- family
or private businesses
- privatizations
of public sector
businesses, and
- companies
in receivership.
To finance a leveraged buy-out, a
buy-out
firm forms a new company and (with management and employees) provides
the
equity. It then arranges the debt financing, which includes senior debt
(from commercial banks), mezzanine debt (from banks, insurance
companies
and mezzanine funds), and high-yield ("junk") bonds (bought by the
public).
The proportion of each financing component depends on the nature of the
target company and how much debt its cash flows can support.
Sample Buy-Out Financial
Structure
|
United States |
Europe |
| Senior bank debt |
50% |
55% |
| Subordinate debt
(mezzanine and public) |
30% |
15% |
| Equity |
20% |
30% |
| of which,
management stake |
5-10% |
5-10% |
| Debt maturity, senior |
5-6 years |
7-8 years |
| Debt maturity, subordinate |
10 years |
8-10 years |
The article focuses on the
common
elements of
European buy-outs, contrasting the European market with the U.S. market
where possible.
The
(Harvard Business
Shcool Case Study # 9-296-051) article is available from Harvard
Business
School Publishing (hbsp.harvard.edu)
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