In a deal worth some $1.5 billion, private equity firm Cerberus Capital Management LP has agreed to acquire defense contractor DynCorp International Inc. It is one of the largest leveraged buyouts of recent times, with Cerberus paying $1 billion in cash and assuming Dyncorp’s debt.
Proving that the days of obtaining leveraged loans are a distant memory, Cerberus is using almost $600 million of its own funds to finance the acquisition, which represents almost 60 per cent. of the cost of the transaction, excluding debt. This is a much higher proportion than the 15 to 20 per cent. that private equity firms typically contributed during the boom years of the leveraged buyout, which peaked in 2007.
A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. This allows companies (often private equity firms) to make major acquisitions without much capital outlay. The borrowing is usually in the form of bank loans or bonds, and the assets of the target company are used as collateral for the loans.
LBOs took off in the 1980s and there are many instances of junk bonds being issued to finance such acquisitions, as well as a ratio of some 90% debt to 10% equity. Many companies have been bankrupted and investors left out of pocket as a result of this kind of high-risk speculation. Whilst banks and bondholders have become somewhat cautious since the worldwide recession hit, it is likely only a matter of time before the good times return and business is resumed. It is to be hoped that lessons have been learnt from the recent past, and it may also be wise to read up on a certain Greek myth involving Hercules and a three-headed hound.
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