Leveraged Buyout – LBO
LBO represents the acquisition of another company where the money used for acquisition costs is mainly borrowed. Usual LBO ratio is 90% debt to 10% of equity and it is not strange that the acquired assets are used as collateral for loans. The excuse for this kind of business arrangements is making easy to companies to acquire large companies without having to commit a lot of capital.
Bonds that are bought with debt/equity ratio this high are called junk bonds.
These acquisitions have shown to be very dangerous because some companies that have been acquired in this way are not capable to meet obligations they are put in by this acquisition.