Case study

 The Leveraged Buy-Out of Seagate

by Professor Ian H. Giddy
New York University


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 ( | | | | contact
Copyright ©2005  Ian Giddy. All rights reserved.