Leveraged buyback definition
/What is a Leverage Buyback?
In a leveraged buyback, a company uses debt to repurchase its own shares. The result is fewer shares outstanding, and possibly more concentrated ownership of the business.
Advantages of a Leveraged Buyback
Employing a leveraged buyback increases the earnings per share of the issuer, since the number of shares in the denominator of this calculation is reduced. Public companies routinely take on debt in order to buy back their shares, on the grounds that investors tend to bid up the price of company shares as a result of the improved earnings per share results. Another advantage is to make a firm a less interesting takeover target for a hostile buyer. The buyer would have to assume responsibility for the debt, which would reduce any positive cash flows that might otherwise be expected from the acquisition.
Disadvantages of a Leveraged Buyback
Engaging in a leveraged buyback increases a firm’s interest expense, its debt load, and its breakeven point, so the outcome is an increased level of risk. Further, a business will likely need to engage in cost-cutting in order to pay down the associated debt, which reduces the amount of funding available to pursue new opportunities in the marketplace. It also leaves less cash available to make capital investments in the firm, which could harm its long-term prospects.