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
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
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.