In an LBO, there is generally a ratio of 90% debt to 10% equity. Because of this high debt/equity ratio, the bonds usually are not investment rank and are referred to as junk bonds. Leveraged buyouts have had a notorious history, particularly in the 1980s when several prominent buyouts led to the eventual bankruptcy of the acquired corporations. This was generally due to the fact that the leverage ratio was nearly 100% and the interest payments were so large that the company’s operating cash flows were unable to meet the obligation.
One of the bigest LBOs on record was the acquisition of HCA Inc. in 2006 by Kohlberg Kravis Roberts & Co. (KKR), Bain & Co., and Merrill Lynch. The three companies paid around $33 billion. for the acquisition.
It can be considered ironic that a company’s achievement (in the form of assets on the balance sheet) can be used against it as collateral by a hostile coporation that acquires it. For this cause, some regard LBOs as an particularly ruthless, predatory tactic.