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Leveraged Buyout Activity in the U.S. Economy

This research examines the leveraged buyout (LBO) activity in the American economy. The specific focus in this examination is on the ethics of this activity.

During the 1980s, corporate mergers and acquisitions assumed historically high levels of activity in the American economy.1 Earlier major episodes of merger and acquisition activity in the American economy (particularly those in the 1960s) were primarily motivated by corporate diversification strategies, in which the principal goal was growth.2 By contrast, the unfriendly takeover (wherein the strategic goal often had little relevance to the primary business activity of the acquiring corporation) characterized much of the merger and acquisition activity of the 1980s.3

Further, an increasing proportion of the acquisition and merger activity in the late1980s was of the LBO variety. An

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: McGrawHill Book Company, 1989), 274.

1 2LBO is one in which the cost of the purchase is largely borne by the firm being acquired. In most instances, these deals are structured to be financed by socalled junk bonds. Junk bond is the term used to describe an (1) original issue, (2) highyield, (3) lowgrade, (4) corporate bond.4 In the context of high and lowgrade, 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

Regardless of the strategic goals involved, merger and acquisition activity usually results in some degree of corpor ate diversification. This result was particularly characteristic of most mergers and acquisitions in the 1980s, where the principal business activities of target firms, as often as not, had little in common with those of the raiding firms.6 Serious questions...

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Leveraged Buyout Activity in the U.S. Economy. (1969, December 31). In LotsofEssays.com. Retrieved 06:05, March 28, 2024, from https://www.lotsofessays.com/viewpaper/1684214.html