The article, "Leveraged Buyouts: Robber Barons of the Eighties," was written in 1989 and takes the point of view that LBOs are potentially inherently evil. In the 1980s, when debt was a four-letter word. "In simple terms, a leveraged buyout begins when investors, assisted by investment specialists, attempt to buy a given company's stock in total. This is done by borrowing against the assets of the company in question, which is known as leverage" ("Leveraged" 1989 54).
The article in also explains some of the tax ramifications and other elements of the economy that are affected by the LBO, as these are called. The biggest problem that the article points out is that there is connected with LBOs a tremendous debt level.
In a LBO, the bidder obtains much of the money necessary to purchase the target company by borrowing from banks, institutional investors (such as insurance companies and pension funds), or the public (through a class of bonds called Junk Bonds because of their risk).
During the 1980s, this borrowing frequently took the form of the sale to investors of high-risk "junk" bonds. The lenders, in turn, often receive the assets of the target company as collateral for their loans. The firm can be seized and sold if its earnings, following the acquisition, are insufficient to make interest and principal payments on the loans, which is where the term "robber barons" comes in.
A management buyout, on the other hand, refers to a corporate buyout in which the managers of the target firm, either alone or with outside investors, are themselves the buyers.
One downside problem with an LBO is that the new owners face a heavy debt service which must come from somewhere, and that source is usually the profits of the target company. To boost these profits, the acquirers might spin off the company's assets or sell off some of the prime properties to generate the cash to pay the
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