|
Investment banks are always looking for ways to boost
profitability, and lately they have found a strong niche
in the leveraged buyout boom of the last few years. With
interest rates at record lows over the last few years,
the higher risk debt used to finance this type of
activity had become very attractive to some investors.
Most financial dictionaries define a leveraged buyout (LBO)
as a debt-financed transaction, typically via bank loans
and bonds, aimed at taking a public corporation private.
Because of the large amount of debt relative to equity
in the new corporation, these bonds are typically rated
below investment-grade, and are properly referred to as
high-yield or junk bonds.
LBO transactions are likely to target companies at
earlier stages, require more operational expertise, and
expand globally to Europe and Asia. Over the years there
has been much debate regarding the value created by LBO
transactions. Skeptics argued that the LBO is simply a
means for Wall Street to earn paper profits by
arbitraging the valuation differences between public and
private markets. Studies by academics and professionals,
however, have provided ample evidence of substantial
value contributed by leveraged buyouts.
A variation of the LBO that has come into use recently
is the leveraged build up. In this case, the fund buys a
small company or a small unit of a big company --
usually one with no more than $ 15 million in revenues
-- that serves as a ''platform'' to which smaller
companies with industry synergies can be added in
subsequent transactions. The screening criteria are
based more on long-term productivity of synergistic
assets than on simply cheap bargain price tags.
The current activity in the leverage sector is stronger
than at any time over the last ten years. The low-rated
high-yield debt related to such deals, known as
leveraged loans, reached $26 billion in the first two
quarters of this year, compared with $24 billion for all
of last year, according to a report from investment bank
Piper Jaffray & Co. At that pace, the total for 2004
would be the highest since about $60 billion in the boom
year 1999.
However, many experts predict that the bloom may come
off this rose soon, as higher interest rates may take
some of the allure from the corporate bonds that are
floated to leverage the buyouts and a more robust stock
market may also provide an alternative investment. |
