2 replies to this topic

[.Blizzard]

Leverage buy-outs became very popular in the 1980s, as public debt markets grew rapidly and opened up to borrowers that would not previously have been able to raise loans worth millions of dollars pursue what was often an unwilling target. LBO activity accelerated, starting from a basis of four deals with an aggregate value of $1.7 billion in 1980 an reaching its peak in 1988, when 410 buyouts were completed with an aggregate value of $188 billion. The persons or company doing such a "takeover" often used very little of its own money and borrowed the rest, often by issuing extremely risky, but high interest, "junk" bonds. These bonds, since the were high-risk, paid a high interest rate, because little or nothing backed them up. No surprise some of these LBO's in the 1980s ended disastrous, with the borrowers going bankrupt

Critics of Leverage buy-outs indicated that bidding firms succesfully squeezed additional cash flow out of the target operations by expropriating the wealth from third parties, for example the federal gevernment. Takeover targets pay less taxes because interest payments on debt are tax duductible while dividend payments to shareholders are not. Furthermore, the obvious risk associated with a leverage buyout is that of financial distress, and unforeseen events such as recession, litigation, or changes in the regularity enviroment can lead to difficulties meeting scheduled interest payments, technical default or outright liquidation. Weak management at the taget company or misalignment of incentives between management and shareholders can also pose threats to the ultimate success of an Leverage buy-out

Edited by .Blizzard, 11 April 2007 - 11:40 AM.

[eminimee]

but let's remember that the spx went up 250% from mid 80 to mid 87

http://stockcharts.com/c-sc/sc?s=$SPX&p=M&st=1980-01-01&i=p22063287622&a=90720826&r=3269.png

[.Blizzard]

.....and let's remember that the NYA went up 110% just in four years, without a real correction

Edited by .Blizzard, 11 April 2007 - 03:51 PM.