The impact of LBOs on strategic direction

Article Abstract:

This article examines the leveraged buyout as a tool for corporate restructuring and focuses on the strategic impact of leveraged buyouts on a firm's corporate objectives. The article documents the increased frequency and size of large leveraged buyouts over the period of 1978-1985. A leveraged buyout brings about four changes in the firm: changes in ownership structure, changes in capital structure, changes in asset structure, and changes in organizational structure. The changes in ownership structure involve significant increases in the stakes of managers and large holdings by the buyout specialist's fund. In addition, leveraged buyouts are accompanied by a large increase in debt financing. These changes in ownership and capital structure influence the strategic decisions made by the post-buyout firm. In the post-buyout firm, asset acquisition and divestment decisions and organization structure changes are aimed towards creating shareholder value and maintaining debt coverage. (Reprinted by permission of the publisher.)

Strategic planning (Business)

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The case for LBOs: the Safeway experience

Article Abstract:

In early 1986, Safeway was reporting record results in sales and net income for the previous year. Nevertheless, the company was subjected to a hostile takeover attempt due partly to Safeway's status as the largest company in an industry that has become attractive to LBO firms. Ultimately, Safeway's Board of Directors reached a friendly agreement with LBO specialists and the stockholders were bought out in a highly leveraged buyout. Since the buyout, the company has sold some 1,200 stores, reduced its outstanding debt by $2.6 billion in two years, and improved the retail operating income over the record pre-LBO results. Improved retail profits were accomplished in spite of (and perhaps because of) becoming more price competitive and offering improved service in the stores. Having reduced the debt to manageable levels, Safeway is now increasing its capital spending levels and has changed its focus from tactical to strategic. (Reprinted by permission of the publisher.)

Management, Case studies, Grocery industry, Grocery stores, Safeway Inc.

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LBOs and taxes: no one to blame but ourselves?

Article Abstract:

Corporate tax savings explain more the 80% of the "value" created by the typical LBO. Our tax system, which allows firms to deduct payments to bondholders but not to stockholders, provides a primary impetus to the LBO movement. The 1986 Tax Reform Act further increased the benefits to extreme leverage. While privately profitable, LBOs have created an economy much more at risk to even moderate economic downturns. The culprits are not the corporate "raiders", but rather ourselves - by creating a tax code which virtually requires firms to use leverage. (Reprinted by permission of the publisher.)

Taxation, Corporate taxes, Corporations

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