Leveraged Buyout Vs. Distress Buyout

You are a well reputed company and came across to buy stake in another company. You are not likely to invest your money into that company, but anyhow intended to purchase stake/controlling interest.

What to do? Ask me i will give u an advice. Do as follows.

1.Decide as to how much stake you want to purchase ( like 20%,50%)

2.Negotiate with the company for the consideration payable.

3.Enter into contract with the company ( Don't pay money)

4.Go to a lender and show the agreement.

5.Pledge your share of assets in that company with the lender and borrow sum.

6.Pay the sum to that company..........Now you have purchased investment in another company with out your money.(of-course substantial risk is involved in this transaction)

The above process is called LEVERAGED BUYOUT.

A leveraged buyout occurs when a financial sponsor acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage(borrowing). The assets of the acquired company are used as collateral for the borrowed capital, sometimes with assets of the acquiring company. The bonds or other paper issued for leveraged buyouts are commonly considered not to be investment grade because of the significant risks involved....

 A guy who want to become rich soon, prayed for god seriously.......

God appeared and gave him 20 lakhs and gave a list of 20 companies.God asked  him to invest 1 lakh in each company so that he will become rich.

The guy saw the companies and gave a jolt (shock)!!!!!

Because those companies are in bankruptcy stage.

I hope now you too are excited to know the answer ........

But the guy believed in god and invested money. Now he is the debt holder in all the 20 companies.

All the companies came out of their distressed (bankruptcy stage) and alloted him equity in the company.

He sold the equity in the market and now ended with 2000 crores.

Wow amazing???!!!!!! This is known as DISTRESSED BUYOUT.

Basically the idea behind a corporate distressed debt buyout is that as a firm is facing a potential bankruptcy it's stock (equity) value is absolutely worthless and has no claim on the value of the firm. The equity is negated and the debtholders (occasionally and most likely bondholders for public companies) retain the controlling rights of the company. These debt holders make all the decisions on the future structure and success of the company. As the company emerges from their distressed (bankruptcy) status the debt is transferred to equity (stock). As the purchaser of the distressed debt most likely purchased it at an extreme discount they are able to now sell the equity at a huge return. That is the theory behind a distressed debt buyout.....