Since they are the ones taking out the loan to buy the target company? How can the target company function or survive if they absorb all the debt and the buying company absorbs all the profit. Is the LBO designed to be predatory? Are there any safeguards to prevent the target company being rimmed out and then cut up for parts?
In: Economics
>Since they are the ones taking out the loan to buy the target company?
Because the target company (usually) is in no position to dictate terms and everyone is happy (in the short term).
Current shareholders get some money and can bail. The new owners can saddle the target company with debt, but have enough time to gut it for parts before the debt comes due.
>How can the target company function or survive if they absorb all the debt and the buying company absorbs all the profit.
Often it can’t. Look at Toys R Us or the slow sinking of Sears.
They are “rescued” or given a short reprieve from dissolution because some group sees residual value that they want to extract. Sometimes that is the whole business, with some minor tweaks or a merger into their new parent brand. Other times, that value is the customer lists or real estate, which they want to extract before the company collapses under its pre-existing problems and the added stress of the new debt load.
>Is the LBO designed to be predatory?
“Designed” is a strong word. The target company is weak (for whatever reason). Wouldn’t it be good to get some strong leadership from a successful company injected?
>Are there any safeguards to prevent the target company being rimmed out and then cut up for parts?
There can be, but again, it is challenging for the target company to negotiate terms due to its inherent weak bargaining position.
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