Funds galore for LBO prospects | Tax snags of a global buyout | Europe is the next frontier | Some examples of recent MBOs | UK buyouts grow in complexity | Managers who succeed as bosses | Spawn of an era: specialist firms
Danger lies ahead for the profusion of leveraged buyouts engineered during the 1980s by American companies and their bankers. During the past four years, conditions have been absolutely ideal for LBOs, with borrowing costs declining steadily and equity prices climbing to new peaks. But conditions won't stay ideal forever. Sooner or later, US interest rates will almost certainly rise again, stock prices will stop going up and a recession will undermine corporate cash flows. When the tide turns, capital gains opportunities will vanish. Worse still, thinly capitalised buyouts built on heavy debt leverage and high-interest junk bonds will be stretched to the limit, and perhaps beyond.
Yet few people seem very worried, and Federal Reserve chairman Paul Volcker's warnings about the excessive use of junk bonds have largely fallen on deaf ears during the past year. As the end of 1986 draws near, the great American buyout binge continues unabated. Huge amounts of low-quality debt keep piling up on buoyant balance sheets, and new buyouts are being leveraged on top of older ones.