The concept of a leveraged buyout (LBO) is simple; the acquisition of an existing company is completed using mostly borrowed funds, usually taking the form of a ratio of 90% debt to 10% equity. This ratio reflects the ideal structure for the maximum bang for your buck – debt capital being considerably cheaper than equity capital.

The first leveraged buyout of a publicly traded company happened in 1986, and since then they have become an increasingly popular method of acquisition. They provide a great way for a company to purchase another one without needing to come up with the majority of the funding initially, allowing them to benefit from the increased cash flow of the acquired company even if they don't have the initial capital to purchase the company.

The leveraged buyout is a particularly attractive option when it is an “undervalued company”, as this increases the chance of a successful buyout as it sees potential for the company’s future in case the deal succeeds. Furthermore, the terms of the financing usually also allow the acquirer to manage the desired turnaround strategies and eventually exit with a tidy profit.

Despite the often perceived negative connotations that come with the idea of a leveraged buyout, it is useful to note that LBOs don’t always have a negative impact. Used responsibly and prudently, a LBO can actually benefit both the company being acquired and the company performing the acquisition. An LBO can be used to bring hidden value to light, unlock potential, and generally improve the financial stability of a business.

Unfortunately, the reputation of LBOs suffered a serious blow due to the subprime mortgage crash and subsequent financial crisis in 2008, where companies had too much of their financing tied up in high-risk debt. Nowadays, however, firms are learning from this lesson and being more careful with their transactions, to ensure that all risks are properly labeled and calculated. The result of this is that LBOs are now becoming more common once again.

In conclusion, while leveraged buyouts can be risky and sometimes have negative consequences, they can also bring a lot of potential positives to the companies involved and shouldn’t be discounted as a viable financial option or acquisition strategy. With the current influx of private equity firms, the use of leveraged buyouts is set to rise, so it is essential for potential buyers to remain aware of the risks and rewards associated with this type of transaction.