During the 1980s, corporate mergers and acquisitions occurred at historically high levels in the American economy.1 Prior significant episodes of merger and acquisition activity in the American economy were primarily motivated by corporate diversification strategies, in which the principal goal was growth.2 By contrast, the hostile takeover (wherein the strategic goal often had little relevance to the primary busi ness activity of the acquired corporation) characterized much of the merger and acquisition activity of the 1980s.3
As the decade of the eighties progressed, an increasing proportion of the acquisition and merger activity was of the leveraged buyout (LBO) variety. A leveraged buyout is one in which the cost of the purchase is largely borne by the firm being acquired. In most instances, these deals were structured to be financed by so called junk bonds. Junk bond is the term
1P. F. Drucker, "The Problem of Corporate Takeovers: What Is to Be Done?" The Public Interest (Winter 1986): 17.
2W. F. Glueck, Business Policy and Strategic Management, 5th ed. (New York: McGraw Hill Book Company, 1989), 274.
used to describe an (1) original issue, (2) high yield, (3) low grade, (4) corporate bond.4 In the context of high and low grade, this definition is generally applied so that the lowest ranked bond which would be included in the high grade classification would be Moody's Baa.5
Serious questions have been raised about LBOs. Some observers contend that they may be viewed as a form of insider trading.6 In such a context, the acceptability of such deals would demand further consideration. Other observers hold that LBOs, in concept, as well as in reality, are harmful to the overall economy.7 This contention challenges the view which cautions against governmental regulation of LBOs.
This research examines LBOs from these two perspectives indicated above. First, a determination is sought on the ques tion...