Rehabilitating the Leveraged Buyout

Rehabilitating the Leveraged Buyout
By: Kester, W. Carl, Luehrman, Timothy A., Harvard Business Review, 00178012, May/Jun95, Vol. 73, Issue 3
´┐╝LBOs are best know as financial plays. As practiced by Clayton, Dubilier + Rice, they can also promote corporate renewal
Once the rage of Western capitalism, leveraged buyouts have lost their glamour and much of their respectability. Suggest an LBO today as a healthy way to create value, and polite company outside of Wall Street will assume you are just trying to stimulate lively conversation. Propose it as a means of improving operating performance by restoring strong, constructive relationships among owners, managers, and other corporate stakeholders, and you may be viewed as a refugee of the 1980s, deluded by the decade of greed.
It's easy to see why LBOs have developed such a negative image. Even when they were booming, critics complained about "paper entrepreneurs." And when the boom faded, a wave of bankruptcies ensued. Since 1987, scores of companies that had been acquired in highly leveraged transactions and that managed more than $65 billion in assets have filed for bankruptcy. The spectacular fall of Drexel Burnham Lambert and junk-bond pioneer Michael Milken added to the perception that the LBO wave had been whipped up and sustained by unscrupulous financiers who enriched themselves at the expense of others. Harrumphing members of Congress held hearings. Soon, a chorus of I-told-you-sos from LBO critics and finger-pointing in the savings-and-loan and banking industries turned leverage into a dirty word. Even the LBOs that "worked" were dismissed as good luck or, more often, the result of deep and painful cuts in employment, investment, and R&D spending. Indeed, it seems as if almost every sales or purchasing manager has a story to tell about a good customer or supplier who was "ruined" by an LBO.
Although some leveraged buyouts may have deserved the criticism they have received, we believe that the overall...