THE THRIVING LBO Since Houdaille Industries went private in 1979 in the first major leveraged buyout (LBO) of a public company, the LBO has become a standard financing tool. At a time when few LBOs ever passed the $100 million mark, the $355 million Houdaille Industries deal marked the origin of a new market. The LBO business has prospered, perhaps beyond even its founder's wildest dreams. The total market has grown from $2.9 billion in 1981 to $16.7 billion in 1985. And, last year, Beatrice Co was taken private by the LBO specialist firm, Kohlberg Kravis Roberts, in a record transaction totalling $6.2 billion.
While many economists predict that the proliferation of LBOs is destined to drown the US economy in a flood of unmanageable debt, LBO investors apparently are unalarmed by the prospect. Also, declining interest rates have made leveraged buyouts easier to finance. Lower financing costs also enhance the appeal of junk bonds, which play an increasingly important role in financing and are integral to deals larger than $500 million where multiple layers of financing are required.
But what happens when interest rates go back up? Or when the economy slows down? To date, there have been only a few LBO bankruptcies -- Thatcher Glass, Brentano's Havatampa -- and these were relatively small transactions that had scant impact on the market.