Reverse Leveraged Buyout

A reverse leveraged buyout occurs during the offering of shares to the public by a company that was taken private during a leveraged buyout. In the leveraged buyout, a private equity firm would have purchased the publicly traded company by borrowing heavily (using leverage) to purchase all the company's stock and using the target's assets as collateral.

After the LBO, the private equity firm repackages the company while it is privately owned and can't be as heavily scrutinized by the public. It then offers the company's shares for sale again in an RLBO. A number of academic research studies covering the period from 1980 to 2000 found that shares issued in RLBOs performed well after the IPO.

During a leveraged buyout, high levels of debt often force a business entity to streamline operations, due to a lack of money to be wasted on frivolous expenditures. A successful LBO can often materially correct a flawed business model, as such, it often makes sense for a private entity to return to capital markets to raise needed capital. A private equity firm may also want to exit a successful LBO by executing a reverse leveraged buyout (RLBO).

The performance of reverse leveraged buyout performance is mixed. Most empirical studies show favorable results initially post-RLBO, with returns deteriorating over time which seems reasonable as efficient entities may once again return to wasteful habits after going public.

Hilton Hotels is a good example of a successful reverse LBO: In 2007, Blackstone Group purchased Hilton Hotels for $26 billion in an LBO, financed through $5.5 billion in cash and $20.5 billion in debt. As the financial crisis of 2009 began, Hilton had major problems with declining cash flows and revenues. However, subsequent to that, Hilton was able to refinance itself at lower interest rates, operations improved and Blackstone sold Hilton at a profit of almost $10 billion.