Leveraged Buyout

What Is It?

A leveraged buyout, or an LBO, is a takeover financed largely with borrowed money. The buyers put together a financing package consisting usually of some cash and lots of debt.

Here is the audacious part: the acquired company then carries much of that debt. Its assets may secure the loans, while its future cash flow pays the interest and — ideally — reduces what is owed over time. The company ends up helping to finance its own takeover.

The biggest example to date is the leveraged buyout of video game giant Electronic Arts. A group of private equity firms took the firm private for $55 billion in 2026 using a mix of cash and $18 billion of debt.

Why Should I Care?

Why do this? Because debt can magnify returns. Usually, buyers in leveraged buyouts are private equity firms (also referred to as financial sponsors). Suppose a PE fund buys a company for $1 billion using:

• $300 million of its own money
• $700 million of debt

Over the next few years, the business grows and uses its cash flow to reduce the debt load by $300 million. The fund then exits the investment, selling the company for $1.5 billion.

After repaying the remaining $400 million of debt, the owners receive $1.1 billion. They turned an initial $300 million equity investment into $1.1 billion. That is the appeal of leverage, and this mechanism drives some of the largest corporate acquisitions.

What’s the Catch?

Leverage amplifies gains, but it also amplifies mistakes. The debt must be paid whether sales are soaring or slumping. If business weakens, debt payments can consume cash that might otherwise be spent on expansion. Sometimes the sponsor might also load the company with more debt, just to pay itself dividends. This is known as dividend recapitalization.

That pressure can lead to:

• Spending cuts
• Asset sales
• Layoffs
• Bankruptcy

One of the most famous examples is Toys R Us. After a private-equity-led buyout loaded the toy retailer with debt, it struggled for years and eventually filed for bankruptcy in 2017 in the US.