The difference between a leveraged merger and a non-leveraged merger: a leveraged buyout uses its own funds for acquisitions, while a leveraged buyout does not use its own funds for acquisitions. An unleveraged buyout refers to an acquisition that does not use the target company’s own funds and operating income to pay or guarantee the payment of the acquisition price. Most of the acquisitions in early mergers and acquisitions are in this form. Leveraged buyout refers to the strategy of a company or an individual to acquire a company by using the assets of the acquisition target as collateral for debt. Leveraged mergers and acquisitions refers to the behavior of the acquirer, based on its own funds, raising and borrowing a large amount of sufficient funds from investment banks or other financial institutions to carry out acquisition activities. After the acquisition is completed, the company’s income (including the operating benefits of the auctioned assets) is only used to pay for the high proportion of liabilities arising from the acquisition, so as to achieve high returns with less capital.
Applicable conditions
(1) Stable cash flow.
Creditors are particularly concerned about the stability of cash flows. In their view, the stability of cash flow is even more important than its amount.
(2) Stable and experienced management.
The requirements for the managers of the acquisition target are often harsh, because only the managers do their best to ensure that the principal and interest are repaid on time. The stability of personnel is generally judged by the service years of the management personnel. The longer managers are employed, the more likely lenders are to believe they will stay on post-acquisition. (3) There is a lot of room for cost reduction.
After a leveraged buyout, the target company had to bear new debt pressures. If companies can easily reduce costs, the pressure can be alleviated to a certain extent. Possible cost-reduction measures include layoffs, capital expenditure reductions, removal of redundant equipment, control of operating expenses, etc. According to statistics, after the merger of American companies, the average reduction rate of managers is 16%, while the reduction rate of production line workers is very small.
(3) Shareholders’ equity of a certain scale.
On this basis, if the acquirer can make a certain amount of equity investment, such as increasing a certain amount of equity, the risk of creditors can be further buffered. Since the 1990s, the self-protection awareness of lenders has generally increased, and the requirements for the purchaser’s equity investment ratio have become higher and higher.
