Leveraged Buyouts

The famous economist of the United States, George J.Stigler who was the winner of the Nobel Economic Prize, once said, "It was a sort of outstanding phenomenon that a company got to be colossal by merging the competitive opponents." In America, most of the well-known companies developed by constant mergers. So we can see that mergers and acquisition (M&A) is a normal act in world economics, and it has already been a good way to expand the volume, to adjust the structure and to manage better. But, because of lack of capital, lots of companies stopped their feet in M&A activity. Appearing of a special financial method to acquisition——Leveraged Buy-out(LBO), it can solve this problem. Based on the basic theory of LBO in this paper, it analyzed some problems about LBO first, then combined theory with practice to reach the conclusion: hinder of performing LBO in China and inspiration to our reform of economic system. There are six parts in this thesis as follows:Chapter One : Basic theory of LBOAs the name implies, a leveraged buyout represents an ownership transfer consummated primarily with debt. That is to say, a primarily debt-financed purchase of all the stock or assets of a company, subsidiary or division by an inventor group. "High-risk, high-earnings, high-speculaion, high-liability" was LBO's character .In essence, LBO is a sort of ownership restructuring. It must have a certain theory to instruct our research. Here, we selected motivation of LBO and theory of financial level as our basic theory.Chapter Two :Origin and development of LBOIn 1960s, LBO originated in American third major merger wave. From 1970s to 1980s, LBO developed in a sound way with the participation of financial intermediary and new-type financial tool's appearing.There were a lot of factors to promote the rapid development of LBO. Amendment of Tax Law, loose of policy to financial institution, development of world market and international trade were involved. At the same time, high earnings turned the stockholders, managers, brokers, invest banker, lawyers, accountants and commercial bankers into the enthusiastic participant.Chapter three: Positive research of LBO: working mechanismThis part drew on the advanced experience of the other countries. By reading this part, you could know how LBO works, which procedure, design of finance, pricing to target company, plans' laying down were involved. At last, a typical case of LBO was used to illustrate the situation of debt-paying, cash flow and gains in LBO.Chapter four: Effect of LBOAs a special activity of restructuring, the participant and organizational forms of business would be influenced by LBO. Firstly, property transferred between the different owners, which was called "Effect of interest distribution". Secondly, the old organizational system was heavily by the new ones which was being after LBO. Both theory consider that income from LBO attribute to value transfer. The cost of agent's theory think that LBO provide so a sort of strict promoting mechanism that the manager must link their reward with outstanding achievement of company closely. At the same ,being a sort of innovation, LBO avoid some malpractice of public company and is fit for those industry whose achievement increase slowly. Chapter five: Special subject on company finance in LBO: Junk Bonds(JB)Junk bonds is called "bonds with high interest", which made the development of LBO into a new stage. The buyers gained the good chance by selling JB, which provided them with adequate funds to buyout. Otherwise, JB means high risk, speculation, if it is abused, the financial crisis would not be avoided, a series of vicious circle would be caused. Comparatively overall analysis and appraise about JB was mentioned in this part, including its character, applying current and action.Chapter six: Hinder of performing LBO in China and inspiration to China economic reformCapital market, financial control and supervision, usage of institution's fund, system of financ...