The basic idea behind an LBO is that the acquirer purchases the target with a loan collateralized by the target's own assets. In hostile takeover situations, the use of the target's assets to secure credit for the acquirer is one reason the LBO has a predatory reputation.
#-ad_banner-#Private equity firms often raise money specifically to conduct LBOs. These LBO funds are often hundreds of millions of dollars strong, which goes a long way considering that these acquirers will borrow most of the money they'll need to purchase their targets. Many LBO funds are divisions of major banks like J.P. Morgan or divisions of private equity firms such as Carlyle Partners or Blackstone Capital Partners.
To conduct an LBO, the acquirer ensures that the target's assets are adequate as collateral for the loan needed to purchase the target. The acquirer must also create and study financial forecasts of the combined entities to make sure that they generate enough cash to cover the principal and interest payments. In some cases, maintaining optimal cash flow could be a challenge if the target's management team leaves after the acquisition.
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