Origins The first leveraged buyout may have been the purchase by
McLean Industries, Inc. of
Pan-Atlantic Steamship Company in January 1955 and
Waterman Steamship Corporation in May 1955. Under the terms of that transaction, McLean borrowed $42 million and raised an additional $7 million through an issue of
preferred stock. When the deal closed, $20 million of Waterman cash and assets were used to retire $20 million of the loan debt. Lewis Cullman's acquisition of
Orkin Exterminating Company in 1964 is among the first significant leveraged buyout transactions. Similar to the approach employed in the McLean transaction, the use of
publicly traded holding companies as investment vehicles to acquire portfolios of investments in corporate assets was a relatively new trend in the 1960s, popularized by the likes of
Warren Buffett (
Berkshire Hathaway) and
Victor Posner (
DWG Corporation), and later adopted by
Nelson Peltz (
Triarc),
Saul Steinberg (Reliance Insurance) and
Gerry Schwartz (
Onex Corporation). These investment vehicles would utilize a number of the same tactics and target the same type of companies as more traditional leveraged buyouts and in many ways could be considered a forerunner of the later private-equity firms. In fact, it is Posner who is often credited with coining the term "leveraged buyout" or "LBO." The leveraged buyout boom of the 1980s was conceived in the 1960s by a number of corporate financiers, most notably
Jerome Kohlberg, Jr. and later his protégé
Henry Kravis. Working for
Bear Stearns at the time, Kohlberg and Kravis, along with Kravis' cousin
George Roberts, began a series of what they described as "bootstrap" investments. Many of the target companies lacked a viable or attractive exit for their founders, as they were too small to be taken public and the founders were reluctant to sell out to competitors: thus, a sale to an outside buyer might prove attractive. In the following years, the three
Bear Stearns bankers would complete a series of buyouts including Stern Metals (1965), Incom (a division of Rockwood International, 1971), Cobblers Industries (1971), and Boren Clay (1973) as well as Thompson Wire, Eagle Motors and Barrows through their investment in Stern Metals. By 1976, tensions had built up between Bear Stearns and Kohlberg, Kravis and Roberts leading to their departure and the formation of
Kohlberg Kravis Roberts in that year.
1980s In January 1982, former U.S.
Secretary of the Treasury William E. Simon and a group of investors acquired Gibson Greetings, a producer of greeting cards, for $80 million, of which only $1 million was rumored to have been contributed by the investors. By mid-1983, just sixteen months after the original deal, Gibson completed a $290 million IPO and Simon made approximately $66 million. The success of the Gibson Greetings investment attracted the attention of the wider media to the nascent boom in leveraged buyouts. Between 1980 and 1990, there were 180 leveraged buyouts involving firms with an aggregate book value of $39.2 billion. In the summer of 1984 the LBO was a target for virulent criticism by
Paul Volcker, then
chairman of the Federal Reserve, by
John S.R. Shad, chairman of the
U.S. Securities and Exchange Commission, and other senior financiers. The gist of all the denunciations was that top-heavy reversed pyramids of debt were being created and that they would soon crash, destroying assets and jobs. During the 1980s, constituencies within acquired companies and the media ascribed the "
corporate raid" label to many private equity investments, particularly those that featured a
hostile takeover of the company, perceived
asset stripping, major
layoffs or other significant corporate restructuring activities. Among the most notable investors to be labeled corporate raiders in the 1980s included
Carl Icahn,
Victor Posner,
Nelson Peltz,
Robert M. Bass,
T. Boone Pickens,
Harold Clark Simmons,
Kirk Kerkorian,
Sir James Goldsmith,
Saul Steinberg and
Asher Edelman.
Carl Icahn developed a reputation as a ruthless corporate raider after his hostile takeover of
TWA in 1985. Many of the corporate raiders were onetime clients of
Michael Milken, whose investment banking firm,
Drexel Burnham Lambert helped raise blind pools of capital with which corporate raiders could make a legitimate attempt to take over a company and provided
high-yield debt financing of the buyouts. One of the final major buyouts of the 1980s proved to be its most ambitious and marked both a high-water mark and a sign of the beginning of the end of the boom that had begun nearly a decade earlier. In 1989,
KKR closed in on a $31.1 billion takeover of
RJR Nabisco. It was, at that time and for over 17 years following, the largest leveraged buyout in history. The event was chronicled in the book (and later the movie)
Barbarians at the Gate: The Fall of RJR Nabisco. KKR would eventually prevail in acquiring RJR Nabisco at $109 per share, marking a dramatic increase from the original announcement that
Shearson Lehman Hutton would take RJR Nabisco private at $75 per share. A fierce series of negotiations and horse-trading ensued which pitted KKR against
Shearson Lehman Hutton and later
Forstmann Little & Co. Many of the major banking players of the day, including
Morgan Stanley,
Goldman Sachs,
Salomon Brothers, and
Merrill Lynch were actively involved in advising and financing the parties. After
Shearson Lehman's original bid, KKR quickly introduced a tender offer to obtain RJR Nabisco for $90 per share – a price that enabled it to proceed without the approval of RJR Nabisco's management. RJR's management team, working with
Shearson Lehman and
Salomon Brothers, submitted a bid of $112, a figure they felt certain would enable them to outflank any response by Kravis's team. KKR's final bid of $109, while a lower dollar figure, was ultimately accepted by the board of directors of RJR Nabisco. At $31.1 billion of transaction value, RJR Nabisco was the largest leveraged buyout in history until the 2007 buyout of
TXU Energy by KKR and
Texas Pacific Group. In 2006 and 2007, a number of leveraged buyout transactions were completed that for the first time surpassed the RJR Nabisco leveraged buyout in terms of nominal purchase price. However, adjusted for inflation, none of the leveraged buyouts of the 2006–2007 period surpassed RJR Nabisco. By the end of the 1980s the excesses of the buyout market were beginning to show, with the
bankruptcy of several large buyouts including
Robert Campeau's 1988 buyout of
Federated Department Stores, the 1986 buyout of the
Revco drug stores, Walter Industries, FEB Trucking and Eaton Leonard. Additionally, the RJR Nabisco deal was showing signs of strain, leading to a recapitalization in 1990 that involved the contribution of $1.7 billion of new equity from KKR.
Drexel Burnham Lambert was the
investment bank most responsible for the boom in private equity during the 1980s due to its leadership in the issuance of
high-yield debt. Drexel reached an agreement with the government in which it pleaded
nolo contendere (no contest) to six felonies – three counts of stock parking and three counts of
stock manipulation. It also agreed to pay a fine of $650 million – at the time, the largest fine ever levied under securities laws. Milken left the firm after his own indictment in March 1989.
Age of the mega-buyout The combination of decreasing interest rates, loosening lending standards, and regulatory changes for publicly traded companies (specifically the
Sarbanes–Oxley Act) would set the stage for the largest boom the private equity industry had seen. Marked by the buyout of
Dex Media in 2002, large multibillion-dollar U.S. buyouts could once again obtain significant high yield debt financing from various banks and larger transactions could be completed. By 2004 and 2005, major buyouts were once again becoming common, including the acquisitions of
Toys "R" Us,
The Hertz Corporation,
Metro-Goldwyn-Mayer and
SunGard in 2005. As 2005 ended and 2006 began, new "largest buyout" records were set and surpassed several times with nine of the top ten buyouts at the end of 2007 having been announced in an 18-month window from the beginning of 2006 through the middle of 2007. In 2006, private-equity firms bought 654 U.S. companies for $375 billion, representing 18 times the level of transactions closed in 2003. Additionally, U.S.-based private-equity firms raised $215.4 billion in investor commitments to 322 funds, surpassing the previous record set in 2000 by 22% and 33% higher than the 2005 fundraising total. The following year, despite the onset of turmoil in the credit markets in the summer, saw yet another record year of fundraising with $302 billion of investor commitments to 415 funds. Among the mega-buyouts completed during the 2006 to 2007 boom were:
EQ Office,
HCA,
Alliance Boots and
TXU. In July 2007, turmoil that had been affecting the
mortgage markets spilled over into the
leveraged finance and
high-yield debt markets. The markets had been highly robust during the first six months of 2007, with highly issuer friendly developments including
PIK and PIK Toggle (interest is "
Payable
In
Kind") and
covenant light debt widely available to finance large leveraged buyouts. July and August saw a notable slowdown in issuance levels in the high yield and leveraged loan markets with only few issuers accessing the market. Uncertain market conditions led to a significant widening of yield spreads, which coupled with the typical summer slowdown led many companies and investment banks to put their plans to issue debt on hold until the autumn. However, the expected rebound in the market after
Labor Day 2007 did not materialize and the lack of market confidence prevented deals from pricing. By the end of September, the full extent of the credit situation became obvious as major lenders including
Citigroup and
UBS AG announced major writedowns due to credit losses. The leveraged finance markets came to a near standstill. As 2007 ended and 2008 began, it was clear that lending standards had tightened and the era of "mega-buyouts" had come to an end. Nevertheless, private equity continues to be a large and active asset class and the private-equity firms, with hundreds of billions of dollars of committed capital from investors are looking to deploy capital in new and different transactions. In September 2025,
Electronic Arts announced it was being taken private for $55bn, the biggest leveraged buyout in history. The consortium of buyers include Saudi Arabia's
Public Investment Fund (PIF),
Silver Lake, and Jared Kushner's
Affinity Partners.
Failures As with all companies, a proportion of companies acquired in leveraged buyouts will experience financial challenges and given the higher
debt-to-equity ratio of LBO targets, these financial challenges can result in default. Especially in the leveraged buyouts of the 1980s in which debt-to-equity ratios often exceeded 9 to 1, defaults occurred at notable levels.
Robert Campeau's 1988 buyout of
Federated Department Stores and the 1986 buyout of the
Revco drug stores were well documented failures that resulted in bankruptcy. The failure of the Federated buyout was a result of excessive debt financing, comprising about 97% of the total consideration, which led to large interest payments that exceeded the company's operating cash flow. Many LBOs of the boom period 2005–2007 were also financed with too high a debt burden, however default rates were significantly below the expectations of market observers given the proximate onset of the
2008 financial crisis. The inability to repay debt in an LBO can be caused by initial overpricing of the target firm and/or its assets. Over-optimistic forecasts of the revenues of the target company may also lead to
financial distress after acquisition. Some courts have found that in certain situations, LBO debt constitutes a
fraudulent transfer under U.S. insolvency law if it is determined to be the cause of the acquired firm's failure. The outcome of litigation attacking a leveraged buyout as a fraudulent transfer will generally turn on the financial condition of the target at the time of the transaction – that is, whether the risk of failure was substantial and known at the time of the LBO, or whether subsequent unforeseeable events led to the failure. The analysis historically depended on "dueling" expert witnesses and was notoriously subjective and it was rare that such findings were sustained. In addition, the
Bankruptcy Code includes a so-called "safe harbor" provision, preventing bankruptcy trustees from recovering settlement payments to the bought-out shareholders. In 2009, the
U.S. Court of Appeals for the Sixth Circuit held that such settlement payments could not be avoided, irrespective of whether they occurred in an LBO of a public or private company. To the extent that public shareholders are protected, insiders and secured lenders become the primary targets of fraudulent transfer actions. In certain cases, instead of declaring insolvency, the company negotiates a
debt restructuring with its lenders. The financial restructuring might entail that the equity owners inject some more money in the company and the lenders waive parts of their claims. In other situations, the lenders inject new money and assume the equity of the company, with the present equity owners losing their shares and investment. The operations of the company are not affected by the financial restructuring. Nonetheless, the financial restructuring requires significant management attention and may lead to customers losing faith in the company. ==See also==