Leveraged Buyouts:

Case Studies of Selected Leveraged Buyouts

GGD-91-107: Published: Sep 16, 1991. Publicly Released: Sep 16, 1991.

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Pursuant to a congressional request, GAO provided information on the effects of leveraged buyouts (LBO) and hostile business takeovers, focusing on: (1) what happened to companies that had been taken over through LBO; (2) how those companies have performed since the takeover; and (3) the effect on communities.

GAO found that: (1) in five LBO that GAO reviewed, purchasers bought out the target companies' equity holders with money from loans and bond issues; (2) the capitalization of the companies studied changed from primarily equity to primarily long-term debt after LBO or recapitalization; (3) employment at the companies declined after LBO and recapitalization as a result of asset divestitures and cost reduction efforts; (4) the overall performance of three of the five companies reviewed diminished after LBO, while one company's performance initially was mixed but then improved, and the last company's fluctuated; (5) since of the companies had locations across the country and were generally a small part of the economic base of any one community, communities were not adversely affected, but one company's headquarters formed a major part of the economic base for the local community and layoffs affected the overall earning power of the community; (6) financial success of the companies after LBO depended largely on their ability to meet the service requirements when due, which was dependent upon the initial price paid, future economic conditions, the value of the company's assets, and management's ability to cut costs, reduce debt, and improve profits afterwards; and (7) in these highly leveraged transactions the purchasers had little to lose if they paid too much and a lot to gain if they could make the surviving company a success, while their advisers earned large fees regardless of the price paid or ultimate fate of the surviving company.