A year and half later, the firm went public and was resold, this time for $290 million. In 1982, a company called Gibson Greetings was sold for $80 million to an investment group that had paid just $1 million of the cost themselves. In other words, the investors acquired the target company for almost nothing, while the shell company took on a massive amount of debt, the effects of which would be mostly felt by the target company. As a result, the investors involved only paid about ten percent of the cost, while getting 30 percent from insurance bonds and 60 percent from bank loans. The money for these buyouts would come from bank loans, insurance bonds and the personal funds of the investors.
Big would still keep a stake in his business, thereby maintaining some control, while the investors would have gotten the target company for a much lower price than if they acquired it at the end of a bidding war with other prospective buyers.
His lawyers would found a shell company and bring in a number of investors who would take out massive loans to buy Mr. So, a lawyer by the name of Jerry Kohlberg developed a solution, albeit a rather slow-moving and lengthy one. Naturally, none of these three choices were especially appealing. Under these circumstances, they generally had three options: first, they could pass the company on to an heir and pay their taxes in full second, they could sell the company, relinquishing control of it in the process and finally, they could go public, putting the business – and its stock price – at the mercy of the market. Not coincidentally, LBOs first came on the scene in the late 1960s, when a generation of people, some of whom had built massive business empires, were getting ready to retire.īecause of the way estate taxes function, if business owners wanted to retire and pass their companies on to their heirs, they would have had to pay huge sums of money in taxes.
These transactions were devised by clever lawyers who were looking for ways to help wealthy business owners skirt estate taxes and pass money onto their heirs. But at its inception, the LBO was simply a way to preserve family wealth. Have you heard the term leveraged buyout, or LBO? Well, by the 1980s, the LBO had become a dirty word, synonymous with corporate greed and the unhinged nature of Wall Street.
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