A leveraged buy-out is a transaction in which a group of private investors uses debt financing to purchase a company or part of a company. In a leveraged buy-out, like a leveraged recapitalization, the company increases its level of leverage, but unlike the case of leveraged capitalisations, the company does not have access to equity markets any more.

Leveraged recapitalization is a corporate strategy in which a company takes on significant additional debt with the intention of paying a large cash dividend to shareholders and/or repurchasing its own stock shares. A leveraged recapitalization strategy typically involves the sale of equity and the borrowing or refinancing of debt.

A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

• Financial reconstruction: involves changing the capital the capital structure of the firm.
• Portfolio reconstruction: involves making additions to or disposals from companies’ businesses eg. through acquisition or spin-offs.
• Organisational restructuring: involves changing the organizational structure of the firm.
  

Leveraged buyout involves the acquisition or purchase of a company (usually a publicly listed company) with substantial use of debt financing. The buyers in an LBO include existing shareholders, managers, and employees.

Potential Advantages:
Usually a publicly listed company that is acquired through an LBO is converted to a private company (i.e. delisted from the stock exchange). On the assumption that the LBO results in ABC being converted to a private company, the following advantages would be enjoyed:

• It will save money from meeting listing requirements.
• Its share value would be less volatile as it will no longer be vulnerable to instability and inefficiencies in the stock market.
• Management can concentrate on long-term needs of the business rather than meeting the short-term needs of shareholders (earning some profit and paying some dividend in the short-term even at the expense of future earnings potential).
• Shareholders would be closer to management. This reduces agency problems and the attendant agency costs.

Besides the advantages that would be derived from delisting the company, there are some potential benefits associated with the involvement of managers in the LBO. The increased stake of managers in the business can increase their commitment and effort with the potential to create more value to the company.

Finally, the huge amount of debt that would come with the LBO can bring potential benefits to the restructured company. First, high interest payments reduces taxable income, which results in lower tax liability. Other factors held constant, the tax shield will enhance the value of the company. Second, the huge debt would somehow make the restructured company less attractive to predators; and so would be protected from hostile takeover bids.

Potential disadvantages:
Some potential disadvantages will result from delisting the company from the stock exchange. One is the reduction in the marketability of its stock, which might have a negative effect on the value of its stock. Compliance with public listing rules is believed to bring about good corporate governance. Unless the restructured ABC clearly demonstrates otherwise, it may be rated low on good corporate governance practices in the minds of the public. This might have negative effect on its credit rating.

A potential disadvantage of ABC being acquired through an LBO is high risk of bankruptcy due to high financial obligations. The success of an LBO is influenced greatly by ability to meet the high interest obligation that comes with the increased debt level. If the restructured company is not able to generate enough income and cash flows, it would default on its huge financial obligations and ultimately go bankrupt.

Calculation of Amount Available if the Company is liquidated and its allocations.

Distributed as follows:

This means that:
(1) If the company had been liquidated, the preference shareholders will lose GH¢3,900 million of the arrears of preference dividends in addition to the total amount of stated capital.
(2) Ordinary shareholder would receive nothing

Analysis:
Allocation of losses 30:67.5
Preference Shareholders 30/97.5 @ 75,600 = 23,262
Ordinary shareholders 67.5/97.5 @ 75,600 = 52,338

If the reconstruction takes place, the total maximum loss would be GH¢75,600 million. Out of this, preference shareholder will suffer a loss of GH¢23,262 million whilst the ordinary shareholder would have to bear GH¢52,338 million.

Analysis of Bank/Cash Balance