5.5 Assignment: Mini Case Study Getting Started A "leveraged buyout" is when a company’s own assets are used as collateral to support a loan that is then used to purchase that same company. It has been described as the company buying itself. In the 1980s, leveraged buyouts became popular as a way to extract more value for shareholders. The approach was highly successful, with several billionaires created in the process. However, this high-risk approach also has serious ethical and financial consequences. It leaves a company saddled with an enormous pile of debt. Frequently the company is stripped of its brands or dismantled to repay the debt. While shareholders and executives may benefit, creditors, suppliers, or employees are often harmed. With this assignment, you will have the opportunity to evaluate a real-life leveraged buyout of your choice, and to carefully consider the ethical and financial implications of the decisions made by executives and their advisors. Upon successful completion of this assignment, you will be able to: Understand innovative approaches to the use of debt in business. Evaluate the implications and appropriateness of the aggressive use of debt. Resources Video: Basic Leveraged Buyout (LBO) Video: KKR Henry Kravis Background Information The leveraged buyout (LBO) has become a famous, perhaps infamous, approach to corporate finance. Whenever people talk about corporate raiders, they are probably referring to leveraged buyouts. The method has been featured in several movies, including Wall Street and The Boiler Room . The record-breaking 1989 acquisition of RJR Nabisco by famed private-equity firm KKR was even featured in a TV movie Barbarians at the Gate . While it is easy to disparage such an aggressive and risky maneuver, there are many examples of where a leveraged buyout has resulted in not only great profits but also greatly improved businesses. When a company is purchased through an LBO, it is taken private, meaning its shares are no longer publicly traded. This frequently gives the company the space and discretion it needs to restructure itself. For example, in 1986 supermarket chain Safeway was purchased by KKR, using only $129 million in cash but over $5 billion in debt. Safeway divested some of its assets and closed many of its unprofitable stores. However, by 1990 the company had greatly improved its profitability and revenue. The company went public again, resulting in $7.2 billion in profits for KKR. Safeway continues to operate successfully to this day, employing some 140,000 people. In 2015, the company was purchased by Albertson’s for $9.4 billion. In this assignment, you will investigate an example of a real-life leveraged buyout that is of interest to you. You will then have the opportunity to analyze whether the decision to take the company private through an LBO was appropriate, not only in terms of its financial results for the company’s owners but also in consideration.