Making large acquisitions can be a complex matter and a leveraged buy-out as a means of doing so is nothing short of complex either. In a LBO, a company can borrow significant amounts of money to acquire a target company, so much so, that the debt could be as high as 90 percent and equity could be 10%. The assets of both companies can be used as collateral to secure such loans.
For example…
Let’s say Coke wants to buy Pepsi. If Pepsi is worth 10 billion dollars, Coke might want to invest five billion in cash for the buyout and five billion in borrowed money. This is an example of a leveraged buyout. Coke will use Pepsi’s assets to secure the loan and assuming the purchase is made, Coke can use Pepsi’s revenues to pay off the loan.
